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Why the political class needs a Greek bailout

There’s been a lot of ink spilled lately on the likelihood that the nation of Greece will default on its public debt, and why it is utterly necessary for the European Union and the U.S. must ride the the rescue with some sort of fiddle involving a combination of (a) massive taxpayer-funded loans, (b) cramming changes in the terms of Greek government bonds down bondholders’ throats, and (c) stern finger-wagging at the Greeks.

Lost in the eye-glazing babble about maturity extensions, haircuts, and which acronymic organization is going to funnel the money into place is the real magnitude of the stakes here. It’s not just the Greeks’ opera-bouffé parody of the modern redistributionist state that is circling the structural-insolvency drain; what really terrifies our political class is the prospect that, very soon, the investors simply won’t buy government bonds anymore – and massive borrowing through bond issues is the only thing keeping the redistributionist state afloat.

As I have documented many times on this blog, the entitlement-spending commitments of the U.S. Federal government, most U.S. state governments, most European governments, and indeed most national governments everywhere exceed the capacity of their economies to generate wealth. And demographic trends are making the imbalance worse over time, not better.

This is why raising taxes won’t help. The amount of private wealth available to be taxed is insufficient, even if taxation could be raised to 100% without suppressing all economic activity. In practice, raising taxes leads to increases in spending which more than consume the increased revenue (by a ratio of 1.17:1 in the U.S. since the 1940s).

Cutting military or any other form of discretionary spending won’t work either. If you zero all that stuff out, public pensions and other entitlement commitments still require revenues larger than the taxable private economy can generate.

Nor will productivity growth do it. Mature economies have annual productivity growth in single digits; mature redistributionist states have annual spending growth in double digits. The problem is structural; the Olsonian interest-group scramble generates pressure for increased spending faster than the underlying economy can grow.

Everywhere, the gap between political spending commitments and revenue has been covered by borrowing. The entire system of redistributionism, in which the political class buys the consent of the governed with ever-increasing handouts, has come to depend on the assumption that the bond markets will always be there to be tapped for cash to fund next week’s bread and circuses.

That is the assumption that is now under threat. Greece must be bailed out in order to preserve the illusion that the borrowing can continue indefinitely, that the bill will somehow never come due. When the political class speaks of “contagion”, what they’re really worried about isn’t the solvency of German banks holding Greek paper, it’s a general flight of investors from the sovereign-debt markets.

Our political class, like the aristocrats of the French ancien regime, believes in nothing so firmly as its own indispensability. Après moi le déluge; but when the bond-investor flight happens – and it is now a matter of when, not if – the teetering Ponzi scheme that funds their self-importance will collapse.

You think it can’t happen here? You think structural insolvency is only for volatile Mediterraneans with silly folk costumes and ouzo habits? Then I’ve got one word for you: California.

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274 thoughts on “Why the political class needs a Greek bailout”

Actually, this is not a Greek Tragedy, but a Spanish one. No one gives a hoot about whether the Greek will or will not go bankrupt. Or the Portuguese, or the Irish. That is small change. But if Greece falls, the Portuguese and Irish will fall. And then the Spanish economy will go down. And that is real money.

For the rest, it is about how you value currencies. It is about whether the Germans want to support the Euro or not. Because, it is the Germans, and French, that earn all the Euros.

Btw, the Greek dept is only a fraction of the money the Americans defaulted on. Trillions of Euros were lost in the American bank crisis (money borrowed and spend by Americans, but never paid back). So part of the anger towards the Greek is actually displaced anger towards Goldman Sachs cs. It is much safer to chastise the Greek and Irish than the Americans and Brits.

I’m in California, and yes, we’re well pass the point of no return. Too bad I cannot be elsewhere and watch this with detached view. I just hope that when they dragged us down to the 9th level of hell, that the freeway still works and I can still get to my job.

The amazing part is the closer we get to the flame.
The faster our “leaders” speed toward disaster.
But as Dylan and esr say It’s All Over Now, Baby Blue!!!
Here is what is needed. Way overdue actually.

Every normal man must be tempted at times to spit on his hands, hoist the black flag, and begin slitting throats.
–H. L. Mencken

Rob Sama: BitCoin having a role in a collapse? Seriously? The collapse is measured in trillions or tens of trillions of dollars, BitCoin’s economy is sized in the low millions if you’re quite generous, and based on the currency manipulation of a couple of weeks back, I’d guess in the low hundreds of thousands of dollars tops. It’s multiple orders of magnitude from mattering under even the most generous of assumptions.

And I’m generously reading “role” as “any significant role at all”; obviously you don’t mean that it will be the proximate trigger or anything. Or so I hope you don’t.

Certainly not. Just trying to gauge whether or not people think that there could be a flock to Bitcoin or not, if there is potential for Bitcoin to become a real alternative currency when the economic collapse occurs.

The other thing that terrifies the Political Class is the stuff going on in Peoria, Philadelphia, Chicago, etc.. They know that eventually it will be them on the wrong end of the riots. Not that they don’t deserve it.

People will still want to trade after the collapse, and they’ll still want some convenient medium of exchange. The reasons for having money in the first place won’t go away, even if existing currencies implode/become hopelessly discredited. Discussion as to what people might use for money after the dollar and euro become worthless seems valid.

Anyway if the collapse is bad enough, the goldbugs, for example will be severely disappointed. The “intrinsic value” of gold being mainly social convention after all.

Here in the UK everyone is moaning about spending cuts. In reality there are no cuts, apart from a slight cut to the rate of increase of spending. I’d like to think there is a chance Austrian economics will become popular before the collapse. Or maybe afterwards.

If you zero all that stuff [discretionary spending] out, public pensions and other entitlement commitments still require revenues larger than the taxable private economy can generate.

This is one of those cases where linking back to source materials is good. Right now, your piece comes off almost as disinterested observation of the impending demise of a class of politically connected fools. You and I largely agree on what’s happening, and I know where I’d source that.

However, if you’re aiming to persuade and fore-warn the people who don’t already agree with you, documentation of claims like this, especially documentation that does not turn into eye-glazing stultification, is important.

If I’ve misinterpreted your intent on this piece – note, not contesting the assumptions at all, but your intended result from posting it – kindly correct me.

It is my sincere hope that the PIIGS situation blows up before we have California, Illinois and New York coming to Congress threatening to default. A cautionary tale, told in time, can do wonders.

Rob – BitCoin, dollars, Euros…They are all the same. They are not based on anything of intrinsic value. The collapse will take out anything that does not have substance.

Any medium exchange is valuable exactly because others will exchange for it, not because it has any “intrinsic” value. The major innovation of BitCoin is that it’s impossible to inflate, and as long as you’re using money in some form, using one that can’t be “counterfeited” by an issuing government looks appealing.

Here’s a sincere question asked in the hopes of getting an answer: How is Bitcoin being non-inflationary, and in fact being deflationary a good thing in a currency? If I can get hold of some currency and without expending any effort have its value increase as it sits under my mattress, what use would I have in spending it at all? In fact if the world economy and economic activity keeps increasing, and the number of bitcoins is strictly limited, wouldn’t that mean my money is always gaining value as smaller and smaller fractions of a bitcoin will have to be exchanged? If so, why is this good? With inflationary money I need to do something with it now, in the present, to generate increased value that will offset its decrease in value due to inflation. I have to buy better equipment so that my hypothetical farm can be more efficient. I have to build a more advanced fab so I can create cheaper CPUs. If I could achieve greater wealth without doing any of those things how would that be a net benefit to the economy?

Greece must be bailed out in order to preserve the illusion that the borrowing can continue indefinitely, that the bill will somehow never come due.

That assumes that TPTB recognize this. I’m skeptical that they do. (Though to be fair, I suppose I’m also skeptical that they don’t. Bankers can be surprisingly smart about this.)

BitCoin’s not 100% immune to inflation. Only about 1/3 of the total theoretical BitCoin supply exists; a run on botnets could “flood” the market with most of the other 2/3, if I understand the mining mechanism properly. Granted, though, this won’t inflate the currency that much – but only because there’s so damned little BC supply at any rate. No country bigger than, like, Samoa could have its economy move to BC, and that’s assuming all of BC is on the market, and at the most favorable exchange rates I’ve ever heard of.

Meanwhile, we know BC value is one compromised computer away from massive devaluation as well.

How is Bitcoin being non-inflationary, and in fact being deflationary a good thing in a currency?

This is something I’ve wondered myself. As best I can tell, whether a currency is inflationary or deflationary is good or bad depends entirely on where you sit on the credit / debit spectrum. If you’ve lent a lot of money out, deflationary’s good. If you’ve borrowed a lot of money, inflationary’s good. In the long run, though, it doesn’t seem to matter, since interest rates will adjust to the rate of in/deflation. The problem arises from the fact that future in/deflation is wildly unpredictable if the money supply is controlled by a small cabal – aside from the smart guess that the money supply will fluctuate based on whatever is most beneficial to whomever controls that cabal.

If that’s true, then BitCoin is theoretically advantageous because there’s a hard cap on the total supply, meaning no one controls it. (But that’s not really true, either, since anyone with enough initial capacity can suddenly decide to hoard BitCoins.)

We always knew that when they raised taxes they just spent all the extra money. Intuitively, one always had the instinct to add “and then some!” Well, here’s the study (the latest of at least two studies, actually) that formalizes that instinct.

There is also the demographic problem. Europe is dying – literally. They don’t have enough babies to replace the population, and require immigrants to do many of the jobs.

If the young are supposed to support the old, you need young people. The original form of social security was a large family.

We also don’t means test, nor really test for benefits – someone who is fully functional qualifies for disability, elderly get whatever they want medically, the retirement age inches although 65 was old when it was created.

I have wondered myself why any investor buys treasuries, when they pay only about 3.1% on the ten year note. Are investors not aware that there are plenty of stocks you could buy that pay a bigger dividend than that? And these companies finances are a lot more solid than that of the U.S. government.

With stocks, you also have the chance to take part in some price appreciation as well.

With these bonds, I don’t see anything but the chance to take a cramdown and a big haircut. Already these things have a negative real rate of return when inflation is factored in.

And this whole thing will accelerate if the government has it’s credit downgraded due to so much debt; the interest rates on the paper will have to rise.

@jmg>Here’s a sincere question asked in the hopes of getting an answer: How is Bitcoin being non-inflationary, and in fact being deflationary a good thing in a currency?

As productivity grows and costs are reduced through new technology, deflation is the norm. This is true with a fixed amount of currency. A holder of capital (saved production) reaps the dividend of the entire productive economy. In a situation where some entity controls the quantity of the means of exchange, the controller reaps the dividend…….and the slaves toil in the field for ever depreciating units. A kinder, gentler, and voluntary means of slavery. If you understand the system, you may profit from it if you choose. I prefer to be on the side of increased production.

@Darrencardinal>I have wondered myself why any investor buys treasuries, when they pay only about 3.1% on the ten year note. Are investors not aware that there are plenty of stocks you could buy that pay a bigger dividend than that? And these companies finances are a lot more solid than that of the U.S. government.

Inertia. That and there are a lot of people who need to park temporary capital. No other currency has the depth required.

My worry is we have an “emergency” and are suddenly required to hold X percent of our retirement in treasuries….for our protection of course. Because you all know the stock market isn’t safe……get some KY it’s BOHICA time.

I have always been slightly skeptical about the official reason that RSA Security gave for stopping their crypto challenges. Perhaps they realized that there might be some viable math that would lead to easy solutions to RSA and elliptic curve cryptography, and too much support for research into that would be bad for business.

With the bitcoin market cap now over $100 million dollars, it presents a much more remunerative cryptographic challenge than RSA ever offered. And, oh yeah, if I managed to crack cryptography fairly quickly, I would preferably make it look like I had stolen the odd large wallet.dat — bitcoins are fungible like bearer bonds, but you wouldn’t want to spook the punters by making it obvious that you could break cryptography to get them…

The excessive entitlements is not an accurate picture of the situation. The average retirement ages for Greece are 62 for men and 60 for women, the roughly same retirement ages in Germany [1].

In the EU, the value of the euro is less than if Germany had its own currency; the opposite is true for Greece. Germany benefits from a devalued currency, and Greece is hurt by it: German exports have a lower price thanks to the euro. Greece has a weaker economy, and thus lower government revenue. When the economic crisis struck, it more deeply affected Greece’s government revenue than Germany’s.

@esr: “What really terrifies our political class is the prospect that, very soon, the investors simply won’t buy government bonds anymore – and massive borrowing through bond issues is the only thing keeping the redistributionist state afloat.”

I think that we are all suffering from a failure of imagination. I’ve read a good deal of history, I know that nations, currencies and systems can die…and yet, I still have enormous trouble picturing a modern Western world that doesn’t look more or less like the current one.

I’m hardly the only one thinking this way. From the June 25th Economist:
“Growth will inevitably slow [in China] over the next decade, as China settles into its status as a middle-income country, and the burden of caring for an ever larger number of elderly people in a slower economy may make middle-class life far more uncomfortable…The country still has a long journey ahead in its efforts to build health-care, pension, and social-security systems to reassure citizens: all of these are necessary to persuade the middle class to save less.” (Emphasis mine)

A nation without these systems appears to be one in which everyone frantically saves as much as they can both for old age and for a rainy day. It’s an economy with much less consumer spending, which can lead to a deflationary spiral downward. But as Eric said, the system is not sustainable.

So what will the new system of tomorrow look like? How do we make the transition to a night-watchman state where people actually spend enough of their incomes to create full employment? The only cases I know of an industrial nation achieving full employment without a redistributionist system involve massive exports, and that can’t work on a global scale. There isn’t anyone to export to any longer.

I live in California, and it’s a mess. The issue here isn’t so much that it legislature is irresponsible (though I’m certainly not defending them), as that voters initiatives have over time allocated more and more of the budget outside the control of the legislature. So until California throws away its Constitution and annuls all of the voter initiatives, the problem can’t be solved.

I think there is a lot of Constitutional reform in the future of most modern democracies, whether their citizens like it or not.

True, governemtns do not generate wealth directly. However, they do finance programs that generate significant productivity gains a few decades down the road (think highway system and darpanet). No sane private corporation should make the large upfront investments required to build out infrastructure on a national scale.

In general, the entitlement systems will have to be significantly reformed to make a dent in the debt. However, voters elect politicians who are re-elected by promising free bread and circuses for everyone. Until THAT fundamental flaw is fixed (an educated electorate that can see the world in its complex splendor might help), then I don’t expect anything to change.

True, governmetns do not generate wealth directly. However, they do finance programs that generate significant productivity gains a few decades down the road (think highway system and darpanet). No sane private corporation should make the large upfront investments required to build out infrastructure on a national scale.

In general, the entitlement systems will have to be significantly reformed to make a dent in the debt. However, voters elect politicians who are re-elected by promising free bread and circuses for everyone. Until THAT fundamental flaw is fixed (an educated electorate that can see the world in its complex splendor might help), then I don’t expect anything to change.

@ Cathy>I think that we are all suffering from a failure of imagination. I’ve read a good deal of history, I know that nations, currencies and systems can die…and yet, I still have enormous trouble picturing a modern Western world that doesn’t look more or less like the current one.

I’m hardly the only one thinking this way. From the June 25th Economist:
“Growth will inevitably slow [in China] over the next decade, as China settles into its status as a middle-income country, and the burden of caring for an ever larger number of elderly people in a slower economy may make middle-class life far more uncomfortable…The country still has a long journey ahead in its efforts to build health-care, pension, and social-security systems to reassure citizens: all of these are necessary to persuade the middle class to save less.” (Emphasis mine)

Yes…failure of imagination. If all we want is jobs…suppose we outlaw cars and trucks. From now on everybody and all goods shall be carried on the backs of other people. Instant 100% employment. Who the HELL wants employment??? Where is it stated that this is the goal?

Suppose I invent the replicator and it is powered by ZPE, cold fusion, the wheels of the cosmos…choose your own personal favorite. What would people do?

You wonder when the younger generation will finally realize that they were ripped off by Big Government politicians, with the connaivance of a media that was happy to shill for their ideological teammates. Or if.

Without employment, what will you eat? How will you buy food? How will you arrange for shelter?

No…you missed my point. If I had a device that would provide for my every need at zero cost, what would I do…..

This is the story of technology. Just do the projection. Where will it lead. Who the hell wants a job? The answer….nobody. People want freedom. What if technology were advanced enough that labor was essentially unnecessary? Are you a Luddite? Does your work give you meaning?

Without employment, what will you eat? How will you buy food? How will you arrange for shelter?

@Cathy:
You don’t need employment to buy food or arrange for shelter. You just need a way of being productive enough to buy what you need. You think like a statist. Forget TMR’s pipe dream of inventing a replicator. It’s nonsequitar.

If we got that much closer to achieving nirvana in a utopia (obviously replicating replicators to start with), we’d soon find that there are some mighty lonely boys out in Asia, and maybe the technology could help.

Possibly in one of two ways — either clone a female, or convert a male into bits for a few years until the population hopefully evens out a bit. Of course, the next thing you know, we’re modifying the bits when they’re in the replicator, living forever, etc.

I think his point is that there are some needs that are not “material”, at least not directly. And that people will be motivated to meet them, and that some form of status seeking necessary to compete for them.

meat.paste writes “True, governmetns do not generate wealth directly. However, they do finance programs that generate significant productivity gains a few decades down the road (think highway system and darpanet). No sane private corporation should make the large upfront investments required to build out infrastructure on a national scale.”

Thankfully, history gives us many examples of insane private enterprise making large upfront investments to build out infrastructure on national scales.

also @ M. Greywolf “nonsequitar”…..non sequitur? I think it follows. A though experiment used to expose logical fallacies. I deal in reality, but I do not lack imagination.

I can imagine a situation where we do not have to worry about basics. This does not mean there are not divisions in society. Many greater minds have speculated about what such a society would look like. I don’t pretend to have the answer, but I’m not afraid to ask the question.

In 406 AD, it was completely unimaginable that Rome could fall. In 410AD Rome fell, was thoroughly looted, the women thoroughly raped. In 416 AD it was still unimaginable that Rome could fall, or could have fallen.

Rome pulled itself together after previous disasters. It did not pull itself together after 410AD, because it simply went even deeper into denial. Nothing was fixed, because supposedly nothing needed fixing.

All Ponzi schemes must collapse eventually, but predicting exactly when this will happen is very difficult because of the innumerable ways that politicians find to kick the can down the road a ways. What we are witnessing now is a sharp manifestation of cultural evolution. Some parts of society are producing well beyond their consumption, and harbor an illusion that they have stored their “wealth” for future use if needed. Another part of society has consumed well beyond their productive contribution, and harbor an illusion that a government safety net will always be there for them in any future crisis. History teaches us that these factions will eventually collide. When the smoke clears, either the productive element will have prevailed and result in a renaissance, or the entitlement-seduced mob will have prevailed and a neo-darkage will be upon us.

I am a bit of a Language Martinet; one of my sticking points is the very phrase “raising (lowering) taxes” itself. Governments do not raise or lower taxes; they raise or lower tax rates.

Veronique du Rugy of the Mercatus Center did a study on US tax rates and revenues, and found out that regardless of what nominal federal tax rates were being assessed to various income brackets, the revenues actually collected were 19% (±1%). When marginal rates go up, the higher brackets move their investments from taxable equity instruments (that create jobs) to tax-free munis and other shelters. There is a limited amount of money that a government can squeeze out of an economy without shrinking it, leaving less to squeeze next year.

Worse, it is the fear, uncertainty, and doubt about what the tax rate will be in the future when profits are earned from an investment made today that leads investors to play it safe and shelter even before governments actually raise the rates. With this in mind, the best way to maximize long-term revenues is to give the market strong signals that rates will not be raised in the future, perhaps by enacting impediments to exceeding a constitutional cap.

As Thatcher put it so well, the problem with socialism is that eventually you run out of Other People’s Money (which Palin pithily pronounces “opium“, conjuring appropriate mental images of addiction).

> You wonder when the younger generation will finally realize that they were ripped off by Big Government politicians, with the connaivance of a media that was happy to shill for their ideological teammates. Or if.

Never underestimate people’s ability to learn the wrong lesson or to blame the wrong people.

> However, they do finance programs that generate significant productivity gains a few decades down the road (think highway system and darpanet).

Never confuse the exception with the rule.

Yes, the US govt has funded a few things that were a good idea, but its ROI is still horrible because the vast amount of money that was pissed away (best case) or spent destroying wealth (typical case).

> No sane private corporation should make the large upfront investments required to build out infrastructure on a national scale.

I was at a dinner with DE Shaw when someone tried that argument. Shaw is actually a big govt fan, but, to his credit, he pointed out that he’d arranged funding for national scale infrastructure and that he was a minor player.

To be sure employment is important. To have employees you require employers. Employers at least in the
private sector require profits and return on capital. This inconvenient fact has been thrown down a dark hole
in Washington. The imagination and innovation you champion are the by-product of a free market economy.
We are a long way from that and losing ground fast as employers (oil, insurance, doctors, etc.) are scapegoated
to justify the latest government power grab and a never ending cycle of regulations and regulators.
And those government jobs add exactly what to the economy?
It is illustrative that while red states like Texas and the Dakotas are growing jobs the blue states are dead in the
water. The exception being Maryland and Virginia where an army of newly hired commissars are slaving over
the latest diktats needed to save us from the blood sucking capitalists. Only a tinge of sarcasm required.

Enough negativity on to solutions:

Every normal man must be tempted at times to spit on his hands, hoist the black flag, and begin slitting throats.
–H. L. Mencken

After the complete collapse of the German economy in the 1920’s, the Germans did not abolish the state, nor did they abolished taxes or printed money. After WWII, when the whole of Western Europe was a wasteland politically, socially, and economically, Europeans simply rebuild even “bigger” states than they had before. The same happened in Japan and China.

Looking back at history, people seem to shun new ideas after being subjected to a disaster. Their first concern seems to be to rebuild what was lost, and then some more.

My prediction would be that after a complete economic collapse, what grows from the ashes will more likely be worse than what was lost. And yes, people consider me a pessimist and I do not believe in social engineering (I follow Karl Popper in that too).

I am rather ignorant about what happens in the USA. But over here the sentiment is that US job growth is to a large extend based on cheap labor and immigration. Our demographics make it clear that Europeans will have to settle for either moving jobs abroad or accept immigrants to work inside Europe. I expect we will follow the USA in the end and increase immigration, because, with the jobs go the earnings.

> Yes, the US govt has funded a few things that were a good idea, but its ROI is still horrible because the vast amount of money that was pissed away (best case) or spent destroying wealth (typical case).

Half my country was water which was pumped out under government programs (or government backing). Actually, three quarters of our population lives below see level. I would see that as “generating value” by the state.

This gives a different view of “public good”. People opting out of paying for the pumps and levies do not have their lot of land singled out for flooding. Either we all have dry feet or none have. So, defaulters are not tolerated. Pay your share or leave has been the rule of the land even before we had a real “state”.

“@Winter, I could see that being privatized.
1) “Homestead” a few thousand acres of swamp or shallow water
2) Drain it
3) Develop it
4) Sell it for dollars on the penny.”

Indeed. Some early reclamations in the 17th century were initated by private parties. However, at those times the state of Holland and Zeeland were run by the same businessmen as were planning the reclamation. Making separating state and private interests difficult. Tax income was much lower then. As the area was at the time involved in a protracted civil war with the Southern Netherlands (modern Belgium) and Spain, government finances were “interesting” (see the discussion in “The Rise and Fall of the Great Powers” by Paul Kennedy).

However, Amsterdam and its airport are all 4m below sea level. That is not exactly “shallow water”. The main polders are upto 6m below sea level and have an area of 1400 square km (~30x35km). The costs of such a project are “large”. http://en.wikipedia.org/wiki/Flevoland

A correction of my earlier comment. Technically, only a quarter of my country is really below sea level (I wrote half). More land has to be protected against storm damage and river water.

Morgan Greywolf Says:
@Michael Hipp: Here’s a question for you: how long before nobody thinks that the American dollar is worth anything? How long for the euro? For the yen?

No possible way to predict the timing. The collapse is happening right now, but it is a slow-motion train wreck.

The certainty is we can count on the Political Class to do exactly the wrong things to *fix* the problem but all the right things to make it *appear* as if they’re fixing it. It’s all a confidence game.

I think you’re missing the point, Eric. What we’re headed for is not the collapse of the government into anarchy. What we’re looking at is the Cloward-Piven collapse of America into Communism that will literally last until the end of time.

We’re seeing a different aspect of that in the Gunwalker scandal, in which General Secretary Obama successfully smeared gun owners, thus turning back the all-too-brief renaissance of gun rights and paving the way for the coming gun confiscation.

We literally live in Hell, and the rest of eternity will be our infinitely powerful, infinitely evil Democrat owners thinking of new and always fiendishly successful ways to torture us.

It helps to understand the inherent and fundamental nature of the opposing factions, and nature gives us a guide (however imperfect). The collectivists can be thought of as sheep-like herd animals and the political class aspire to be the sheep herders. Conversely, many of the participants on this board are highly individualistic and more like lone wolves. Soon the herd will stampede, the lone wolves will scatter, and the herders will attempt to round everyone up and put them in yolks. Everyone will behave according to their nature.

I think I have said this before, but the US government does have an option to cut spending without significant political cost, in fact, they have been doing it for the past three years. Specifically, devalue the currency. Nearly all US debts are denominated in dollars, so if you devalue the dollar you devalue your debts. Politically, you can spin something scary sounding like “devalue the dollar” and call it “quantitative easing” or “stimulus package”, and make it sound like you are a good guy. Fact is you are devaluing your debts. Some debts are inflation linked, which in theory should offset this, but the government controls the definition of inflation, and they don’t include food cost and fuel cost inflation, both of which are probably the top marginal items in lower income people’s budgets.

Here are the plain facts: in comparison to a stable currency like the Brazilian Real, the dollar has lost 30% of its value in the past three years (going from 2.3 BRL/$ in Jan 2009 to 1.6 BRL/$ today.) However, recipients of social security have not had an inflation related increase in three years (except for a token special payment.) Similarly medicare charge sheets have also not changed. By the way, this dollar devaluation is one of the primary reasons why gas costs so much here — a fact that the press seems to not bother their pretty little heads with.

So, in a Machiavellian way this is a pretty good strategy for dealing with the entitlement crisis. However, despite it all, our politicians still can’t seem to put their pocket book away. Which only shows that democracy is incompatible with sound public finances. Today the deficit is about the same size as the whole budget was a decade or so ago.

BTW, we haven’t even seen the real train wreck yet. In a similarly Machiavellian way the government has oppressed the financial sector, sent CEOs to jail, and threatened tyrannical regulation. Consequently all the banks are very, very conservative right now. So the banks’ relative creation of M3 has been parsimonious, offsetting the Fed’s profligacy. If the banks ever start lending again inflation will surely catch up with reality.

I think a tea party government will be able to do a lot to significantly slow the rot. But I don’t think they will fix it forever. Only a return to constitutional government would do that. And also, they have a bunch of traps set for them, the aforementioned pent up lending, and consequential inflation being the most serious.

And just to be clear, I am not a tea party supporter; crying “Taxed enough already”, and “Save social security” at the same rally causes my head to explode. However I like them better than the other guy.

One thing everyone fails to mention is that, yes, European and American states have massive numbers on welfare support. Yes, this is bad. Yes these people will lose their livelihoods in money. But they *can* be replaced.

What distinguishes America and Europe from Northern Africa and the middle east is that neither of these 2 regions have any realistic hope of feeding their populations without massive borrowing (with far fewer oil-state exceptions than you’d think). And even Saudi Arabia, which can probably buy food for it’s population for the next decade, maybe two, is bordered by at least 2 state who can’t (Yemen, Oman), and let’s not forget it is not unrealistic for a trained swimmer to swim from Somalia to Saudi Arabia, and they *already* have massive immigration from there.

Europeans and Americans will get fucked, sure. A rather substantial lowering of their living standards. At least a hundred million North-Africans and Middle Easterners are going to find their living standard lowered to “death” as a result of halting borrowing.

>We’re seeing a different aspect of that in the Gunwalker scandal, in which General Secretary Obama successfully smeared gun owners, thus turning back the all-too-brief renaissance of gun rights and paving the way for the coming gun confiscation.

Huh? Not in this universe. Fast and Furious is backfiring on the anti-gun crowd as badly as the Arming America fraud did. It’s looking pretty likely to take down Eric Holder, and I won’t be very surprised if it costs Obama his re-election.

“It’s an economy with much less consumer spending, which can lead to a deflationary spiral downward.”

Less consumer spending can mean two things. A) Either the capacities (say, work-hours) not used for making consumer goods are used for making capital goods, which is a Good Thing. B) Or they are not used for anything i.e. widespread unemployment.

Now the Keynesian and Austrian economists are still fighting tooth and nail in which cases happens A and in which cases B but let’s just say both can happen. How do you know it is B that is happening in China and not A?

Jessica Boxer Says:
> And just to be clear, I am not a tea party supporter; crying “Taxed enough already”, and “Save social security” at the same rally causes my head to explode. However I like them better than the other guy.

I am a TEA party supporter, for the simple reason that they’re the only game in town that sorta, somewhat, slightly wants to head in the right direction – and has the ability to win elections. (No, that doesn’t mean I want Palin or Bachmann for Pres, tho they could hardly be worse than the alternatives.)

The TEA party rallyers are indeed delusional with their love of medicare and socsec, but they’re no more delusional than the Democrats and Republicans. Anyone heard anything sane come from their mouths either? Some choice we have.

Different sources disagree on what percentage of California spending is locked down by initiative. Here’s a reference from Stanford Law Review:

“The state’s annual budget charade might give one the impression that its governor and legislature are to blame. But in truth, it is out of their hands. Decades of ‘ballot-box budgeting,’ where voters pass taxing and spending legislation by citizen initiative, has put more and more of the state’s budget out of the legislature’s control. While estimates vary, somewhere between seventy-seven and ninety percent of California’s general fund is ‘set in stone before the Legislature and governor even start negotiating.’ With an increasingly small slice of the decision-making authority left to elected representatives, it is difficult to argue that California is still a representative democracy.”

“Never underestimate people’s ability to learn the wrong lesson or to blame the wrong people.”

This. Without the ability to bribe voters, probably the firs thing that will happen that, ironically, hard-left, as in, Marxist etc. movemements will gain strength. Some kind of positive change is to be expected only long after that.

Which only shows that democracy is incompatible with sound public finances. Today the deficit is about the same size as the whole budget was a decade or so ago.

Pet peeve: We don’t have a democracy. A democracy is when all the people who live in your neighborhood are cannibals and they all vote to eat you. What we have is a constitutionally-limited republic. Or, at least that’s what it’s supposed to be.

As for devaluing the dollar, that’s exactly what they’e doing now. The Fed’s refusal to change the funds rate has been cited as the main reason the dollar has been devalued.

Cathy Says:
> Different sources disagree on what percentage of California spending is locked down by initiative. Here’s a reference from Stanford Law Review:

I’m skeptical of those who want to blame CA’s woes on their many ballot initiatives. The lefties would love to get rid of (or significantly scale back) those ballot initiatives. From a distance it appears those initiatives are the only chance the average Californian ever gets to actually have some say in what happens. Lefties hate that. Despite their lofty words, they do *not* believe in democracy. They believe in rule by priesthood.

@Jessica Boxer: “I think I have said this before, but the US government does have an option to cut spending without significant political cost, in fact, they have been doing it for the past three years. Specifically, devalue the currency.”

This only works if you are getting rid of the real value of past debt you’ve already borrowed. This is not the situation in the 2011 US; rather, under current policies the nation will need to borrow much more money every year for decades. No one will make loans in a currency undering inflation without raising the interest rate to offset it, so nothing is gained.

It’s hard to see how the US can avoid default. It could be done if the entitlement state was reformed now, but politically that’s still impossible. I strongly suspect that the default will come first, followed by entitlement reform (because there will be no other option at that point). High inflation may or may not come before default, but won’t avoid the default.

My fear given current trends is that we’ll see fundamental basic working expenses (e.g., road and bridge maintenance, basic education) neglected in an attempt to keep the entitlement money flowing. It won’t change anything long-term, but it could devastate the infrastructure before reform comes.

I think I partially agree with Winter this time. Basically, Anglo-American cultures have a long history of relying on private initiative. Thus, government could hardly play any other role than the egalitarian, egalizer, redistributor, basically a suppressor of private initiative. Within such cultures thus Libertarians are right. However in different cultures , the ones that have a tradition of relying on state or public initiative, an active government can play a positive role. They would not redistribute much, would not reward the lazy and punish the creative, they would simply invest heavily on infrastructure.

Read up on Ashoka, Charles de Gaulle, and medieval Venice, they are all three great examples of governments managing things right. The crucial difference is that such governments/governors were not egalitarians. This would not work in the Anglosphere, because it does not fit to its tradition of private initiative, but can work elsewhere. I think overally egalitarianism is a bigger problem than government itself. It is big government coupled with egalitarianism is what deadly – in fact I think it is egalitarianism that makes it big. A non-egalitarian government would rather be skinny, efficient and strong than big.

I’m curious to hear from everyone in this thread how they believe this will play out both in Europe and in the U.S. Will we see substantial inflation? Default? In what time frame? Will it take down the world economy in unison? If not, which nations’ economies and currencies will remain strongest? What will the new governments look like — free, or repressive?

>> Yes, the US govt has funded a few things that were a good idea, but its ROI is still horrible because the vast amount of money that was pissed away (best case) or spent destroying wealth (typical case).

> Half my country was water which was pumped out under government programs (or government backing). Actually, three quarters of our population lives below see level. I would see that as “generating value” by the state.

Since Winter’s country isn’t the US, that’s not evidence that my statement is false.

Small European and Scandanavian countries have shown decent governance, at least as long as they’re essentially mono-cultures. In that, they’re like the comparable states in the US. (That said, those states have traditionally been more productive than those countries, but I digress.)

The US govt isn’t working in that environment and it’s working at a much larger scale. We have >300 million people, not 16M.

> While estimates vary, somewhere between seventy-seven and ninety percent of California’s general fund is ‘set in stone before the Legislature and governor even start negotiating.’

Not so fast.

By initiative, half of state spending must go to schools as a result of an initiative. (Thanks CTA.) However, that doesn’t force the state to spend more money than it takes in.

Also, the authors of that sentence pulled a fast one. Bond repayment is “set in stone” and CA has done a lot of borrowing. Most of that was a result of legislative action that the voters then approved. It’s dishonest to call that “voter initiative”. (That said, we’re responsible for it, just as we’re responsible for electing the legislature.)

CA’s debt service is approaching 8% of revenue. Add the education 50% to that and we’re at 58%.

In other words, it’s easy to show that a huge fraction of CA’s spending is affected by initiative, but that doesn’t imply that CA’s over-spending is due to voter initiative.

>>Governments don’t generate wealth, they consume it, destroy it, or prevent it from being created. Governments don’t even generate revenue; they collect it.

> Is that a falsifiable statement? Is there any imaginable scenario where a government creates wealth?

Yes, it’s easy to imagine such scenarios, just as it is easy to imagine scenarios where govts destroy wealth. However, the relevant question is not whether we can imagine various results. It’s also irrelevant whether some other govt destroys or creates wealth. The only relevant question is only what will a given govt do.

The US govt (and various state and local govts) have become increasingly disfunctional as they’ve grown. I suspect that one might find that the amount of wealth created reaches a peak and then remains roughly stable, so any increases are purely wealth destroying.

“In other words, it’s easy to show that a huge fraction of CA’s spending is affected by initiative, but that doesn’t imply that CA’s over-spending is due to voter initiative.”

It doesn’t matter whether spending is “due to” past initiatives. What matters is this: now that we’re in this mess, can the legislature substantially reduce non-discretionary spending by a simple vote? Or is it extremely difficult to reduce spending without going back to the voters and attempting to repeal initatives?

A democracy is when all the people who live in your neighborhood are cannibals and they all vote to eat you. What we have is a constitutionally-limited republic. Or, at least that’s what it’s supposed to be.

You’re one of those crazy “tenthers”, aren’t you? The Commerce Clause clearly gives us the right to our long pork!

BTW – CA could decide to stiff bond-holders without a vote, regardless of how the bond was approved. The money raised by the bond may be mandatory spending, but without repayment, that’s not a budget problem.

Without employment, what will you eat? How will you buy food? How will you arrange for shelter?

If employment is so unimportant, why have people historically been willing to take really lousy jobs for minimal pay? Could it be that the alternative was worse, perhaps?

historically, people also have opted for alternatives, until they were forced to “join the labour force”, by governments passing laws that forbid begging, turned vagrancy / vagabondage into crimes, etc

You’re one of those crazy “tenthers”, aren’t you? The Commerce Clause clearly gives us the right to our long pork!

Tenthers? Never heard of ’em. /me googles “tenther”

Hmmmm…. I’m not sure that I agree that the states have sovereignty per se. Certainly the states and the people have powers not reserved by the Constitution for the federal government, just as the 10th amendment states and this is as it should be, but sovereignty is a bit different. OTOH, I do agree that many of the things these “tenthers” seem to oppose should be stopped, such as the absolutely useless war on drugs along with other limitations on civil liberties.

Cathy says: I’m curious to hear from everyone in this thread how they believe this will play out both in Europe and in the U.S. Will we see substantial inflation? Default?

My sense as an economist is that the problem in the US will be handled by inflation. So, stealth default. But lately overt default has seemed more likely than it used to. The reason is the timing. If Congress and the President wanted to force monetary expansion, they’d have to take over the Federal Reserve System if the Fed didn’t cooperate. But that would require time to get the relevant legislation through the system. And lately, they’ve been pushing this debt ceiling brinksmanship game pretty close to the zero hour. I don’t think they’d have time, between the “oh crap, we might default!” realization and the actual default, to cram a Fed takeover through Congress. So, I can actually now see default as a non-absurd possibility.

If I can sum up this thread, here’s a Heinlein quote (from memory) from the middle of the last century:

“Anyone who thinks the people of the U.S. have solved the poblem of government is using too short a time scale.”

Inflation can’t “handle” the problems in the US, because the US budget projects massive additional borrowing out as far as the eye can see, with nearly trillion dollar deficits annually. That new borrowing – if it is happening at inflated interest rates – will bury the Federal budget rather quickly.

TomC Says:
> And lately, they’ve been pushing this debt ceiling brinksmanship game pretty close to the zero hour. I don’t think they’d have time, between the “oh crap, we might default!” realization and the actual default, to cram a Fed takeover through Congress. So, I can actually now see default as a non-absurd possibility.

I don’t get why the “debt ceiling” and “default” alway seem to come up together, as if one leads to the other. Even if Congress *never* raises the debt ceiling (yeah, right, but we can dream) there is no reason whatsoever for USG to default. There is way more than enough revenue to cover interest payments. They might not be able to pay all the entitlements, soldiers and bureaucrats, but there is no reason whatsoever to default on the debt. Debt ceiling and default are largely unrelated.

> What distinguishes America and Europe from Northern Africa and the middle east is that neither of these 2 regions have any realistic hope of feeding their populations without massive borrowing (with far fewer oil-state exceptions than you’d think). And even Saudi Arabia, which can probably buy food for it’s population for the next decade, maybe two, is bordered by at least 2 state who can’t (Yemen, Oman), and let’s not forget it is not unrealistic for a trained swimmer to swim from Somalia to Saudi Arabia, and they *already* have massive immigration from there.

This isn’t the case at all. Morocco and Algeria both have pretty substantial agricultural resources. Morocco by itself can feed all of northern africa with the exception of Egypt.

The situation ME is slightly different. The region is incapable of self sufficiency on strategic crops (wheat, barley etc) but is a huge producer of agricultural goods that fetch much more on the international markets (fruits, olive oil etc). There is a shift in the agricultural landscape in the ME towards these crops. Similarly saudi arabia is investing heavily along similar lines. They are also investing heavily in other countries with good agricultural potential (mainly south america, africa). Yemen has decent agricultral potential. Oman OTOH does not. The problem with Yemen is that most of its agricultural land is used for the production of one particular crop (Gat) which produces a drug-like substance that the entire nation is addicted to.

The wheat genome (announced last yr) will probably help double global wheat production within the next 10-15 years. Add to that developments like seawater agriculture which have already demonstrated that far more impoverished countries (like Eritrea) can be self-sufficient in food production.

When it comes to renewables potential the ME and north africa are ahead of any other region in the world. CSP plants in a place like saudi arabia can probably produce 1.5x to 2x the amount of electricity vs. the same plant in spain and already these plants are proving to be more and more economically viable in spain.

There is also more than a trillion barrels of heavy crude (similar to the venezuelan variety) that has yet to be tapped in the ME. They have all along been been pumping light crude from the ground because there was never any need to tap into the heavy crude.

The ME has energy. Cheap energy. Lots of growing (developing) economies need that energy which can be easily traded in for food. Add to that the fact that in this day and age “energy = food production”.

I can go on and on. The structural economic troubles of Europe and the US are not mirrored elsewhere (except obviously Japan). We will probably not see similar problems elsewhere in the world for perhaps another 2 to 3 decades. Strategically, the long term prospects for the US&Europe are not all that great. Both regions are diminishing in their importance. The US has much better demographics than all of europe and canada but is probably worse off on almost every other economic measure.

They might not be able to pay all the entitlements, soldiers and bureaucrats, but there is no reason whatsoever to default on the debt. Debt ceiling and default are largely unrelated.

The current Treasury Department says they won’t do this. They then somehow say the TP/GOP hard-core opponents of raising the debt ceiling will be responsible for causing the default. And they’ll get away with it since most people get their news from the mainstream media, Jon Stewart, and Stephen Colbert.

It’s not unlike how a local/state government will insist that if a certain tax isn’t renewed/increased, they’ll have to lay off teachers, cops, firefighters. They always cut the services that taxpayers like first, not the ones we’d be cool with eliminating.

If the gov’t has X dollars in existing debt, it can always print up X dollars to pay it off.
To eliminate any possible confusion: I am not advocating this. And yes, I understand that this will make it harder to borrow more money downstream.

Michael: I don’t get why the “debt ceiling” and “default” alway seem to come up together, as if one leads to the other.

To be sure, one doesn’t logically require the other, in the general case. But if the ceiling becomes a binding constraint on spending, it certainly is more likely that the government will default on its debts.

@Cathy: “now that we’re in this mess, can the legislature substantially reduce non-discretionary spending by a simple vote?”

“Actually, the question is how much discretionary spending there is. (“non-discretionary” is the stuff that you can’t reduce.)”

That’s not how the term is normally used. Entitlements have long been considered non-discretionary, as they are perceived as “rights”. Entitlement programs don’t allocate $X and once it’s gone, it’s gone for the year; instead, at the time it’s passed no one really knows what its cost will be, even in year one. This is the stuff of overruns.

Yet entitlements clearly *can* be reduced, even though they are considered non-discretionary. We saw this in the 1990’s with “the end of welfare as we know it.”

“Does anyone know what fraction of US bonds being sold these days are inflation-adjusted?”

It hardly matters, since Congress gets to define the official inflation rate. I hope you don’t expect your I-bond interest to keep up during a period of higher inflation. There’s too much incentive to claim lower inflation that is actually occuring.

Likewise for entitlement payments, COLAs are very easy to adjust (downward).

As I have documented many times on this blog, the entitlement-spending commitments of the U.S. Federal government, most U.S. state governments, most European governments, and indeed most national governments everywhere exceed the capacity of their economies to generate wealth.[…]

This is why raising taxes won’t help. The amount of private wealth available to be taxed is insufficient, even if taxation could be raised to 100% without suppressing all economic activity. In practice, raising taxes leads to increases in spending which more than consume the increased revenue (by a ratio of 1.17:1 in the U.S. since the 1940s).

It seems to me this is a non sequitur.
If you have a governement spending $1.17 for every $1 it collects, they’re obviously not doing a very good job, but it doesn’t mean that
the entitlement-spending commitments of [… ] most national governments everywhere exceed the capacity of their economies to generate wealth.” If they’d raise taxes so that they’d collect $1.17 for every $1.17 the (want/have to) spend, there wouldn’t be much of a problem. That 1;1.17 ratio does not in any way prove that a given economy can not produce the required amounts of money, it just illustrates that the politicians in questions don’t run their household very well.

I do get what The Monster says about

regardless of what nominal federal tax rates were being assessed to various income brackets, the revenues actually collected were 19% (±1%).

I can see how that works.
otoh, tax rates in, say, Belgium, are way higher, and most people end up effectively paying ~40%. In other European countries, this may even be higher. So that 20% is a US-specific limit, not a hard, universal limit.
Taking that back to esr’s OP, this means that theoretically, US government could be collecting $2 (40% taxes i.s.o. 20%) and spend $1.17.

So, I’m not convinced that raising taxes can’t work, and I haven’t seen proof that “no economy can produce that kind of money”.

I do see that there might be a difference in the sort of tax rates US citizens are willing to accept, and the rates that Europeans will put up with. Which leads me to the conclusion that most of those generalisations and extending US-centric analysis to “Europe and most of the world” is unjustified.

I’m also tempted to speculate that a large part of the problem stems from US culture and values : I’m wondering to what extend the unwillingness of US citizens to pay taxes is related to the following

– the high value that is placed on “every man for himself”, being a self-made man, fend for yourself, …., and the assumption that making money is the sole measure for succes => someone skimming off 40% off of you income can be a bit of a downer then.

– if everybody is brought up with the idea of “looking out for #1”, you’ll obviously end up with politicians that will be looking out for #1. So of course you can trust them to spend your tax money in their best interest, not yours. Obviously, you’d prefer for them to get as little of your money as possible.

>>>“now that we’re in this mess, can the legislature substantially reduce non-discretionary spending by a simple vote?”

>>“Actually, the question is how much discretionary spending there is. (“non-discretionary” is the stuff that you can’t reduce.)”

>That’s not how the term is normally used.

Ah, you’re going after entitlements too. Cool.

Some “entitlements” are discretionary in that they can be reduced by a simple vote. CA recently started a home care program that qualifies.

Others are contractual. Pensions are one example.

Others are more complicated – they’re agreements that can be changed slowly. Examples include MediCal, unemployment benefits, and the various welfare programs.

Of course, if you think that the latter group is significant, you get to reconcile that with “voter initiatives are the problem” as their costs are not driven by voter initiatives. (I think that they are significant.)

> regardless of what nominal federal tax rates were being assessed to various income brackets, the revenues actually collected were 19% (±1%).

> I can see how that works.

You don’t.

> otoh, tax rates in, say, Belgium, are way higher,

They also are in the US, but there’s a huge difference between tax rates and the fraction of GDP that one can collect via taxes.

> and most people end up effectively paying ~40%. In other European countries, this may even be higher.

You do realize that “most people end up paying” has little to do with what fraction of the GDP is collected in taxes, right?

What is that number for European countries? (I’m pretty sure that it’s higher than 20%.)

> So that 20% is a US-specific limit, not a hard, universal limit.

It’s a limit that has held under a wide variety of tax rates, including 70% upper brackets.

> Taking that back to esr’s OP, this means that theoretically, US government could be collecting $2 (40% taxes i.s.o. 20%) and spend $1.17.

No, it doesn’t “theoretically” mean that. The US govt has tried, and failed, to collect more than 20% so any theory that assumes that it can do otherwise …..

Note that gross revenue is the goal, not percentage of gdp. I mention that because “The most common metric for answering this question is taxes as a percentage of GDP. However, high tax rates tend to depress GDP. Looking at taxes as a percentage of GDP may mislead us into thinking we can increase tax revenue more than we actually can.”

Interestingly enough, the US govt collects about as much per person in taxes as european countries. (Yes, less than some, but more than others, including Canada.) If you’re going to argue that the US govt needs european-level revenues for some reason, I’m going to ask why we’re not receiving whatever benefit you’re promising because we’ve got european-level revenues.

It hardly matters, since Congress gets to define the official inflation rate. I hope you don’t expect your I-bond interest to keep up during a period of higher inflation. There’s too much incentive to claim lower inflation that is actually occuring.

Plus, of course, if you purchase TIPS at zero nominal yield and the BLS admits there was 6% inflation, you get taxed on that 6% that the government itself is admitting isn’t a real gain.

@Cathy>I’m curious to hear from everyone in this thread how they believe this will play out both in Europe and in the U.S. Will we see substantial inflation? Default? In what time frame? Will it take down the world economy in unison? If not, which nations’ economies and currencies will remain strongest? What will the new governments look like — free, or repressive?

My crystal ball is cloudy, but I can speculate.

I think some form of default or partial default in the US. Combined with a steady inflation say <10% for a decade or so while lying about it. COLA and I bonds will not keep up. If you are on SS you will get a check, but it won't buy much. You and I will pay more in taxes and get little or nothing in benefits. Retirement age will go up. Means testing will be implemented. Medicare will be available…and nobody will accept it. If you don't have cash forget quick medical care. Possible currency controls. Possible games with retirement accounts to force you to purchase government securities. GS will be in charge of managing that…to get them to go along. I don't know how much they can get away with. Things like this tend to get out of hand. There could be an exogenous event that causes a loss of control. Who knows then. Maybe a Soviet style break up of the country. There are definite cultural and ideological divides. Anybody that thinks the South/Texas and portions of the West are going to go along with some communist style government just aren't seeing things as they are. My nightmare scenarios are as unpleasant as they are unlikely. I think a muddle through and generally crappy business climate is more likely. A possible NZ style transition a positive possibility. If it wasn't for the jingoistic pig headed militaristic silliness infesting the minds of so many muricans I'd be more optimistic, but there are positive signs.

Europe, I'm not as familiar with. I do know that they have demographic problem that makes us look relatively well off. Many of the states there are also further along the road to insolvency. The bureaucracy is also more entrenched and accepted. In the places I like in the US the bureaucracy is not looked upon with any kindness or respect. This is not true in most of Europe (at least in my experience). Except for Italy where everybody cheats on their taxes.

I look forward to a time when everybody just IGNORES the government. I once read a quote that Politics is show biz for ugly people. I wish I could remember who said it.

In order of increasing intelligence:

Hollywood fans
Sports fans
Political fans
Ceiling fans.

Others may decide where to put Apple Fans in the hierarchy.

If you have a source of income in a foreign currency that remains relatively strong you can avoid most of the problems. Your lot in life may actually improve. I spent some time in Mexico in the 90s. The dollar was strong and it was good time. Invest in dividend paying companies in resources/Ag in Canada, SA, Brazil, Asia, South America:spread your risk around.

Of course if the GOV changes the rules all bets are off, I worry about that and allowing the infrastructure to go to pot as you said. That happened in Mexico. There is the Libre for the peasants, and the Autopista (with a hefty toll) for the upper class. That is already happening in some places here. Aside from the kidnappings, car-jacking, and murders, Mexico was great then. I would be prepared for an increase in crime here as well.

I just try to enjoy life and not worry about things too much. We can't control it….and what a show it will be. An artificial reality will be destroyed. If you understand the reality, you can be prepared. Life can still be enjoyable. Historically times of upheaval produce great art, music, and there are disruptive changes in technology. Perhaps some good things in with the misery.

The alternative I see a lot of people falling victim to is to say it is hopeless, we are all going to die. Then throwing their hands in the air. If you believe that you have already lost.

My barber does not have a solvency problem. My auto mechanic does not have a solvency problem.
My favorite steakhouse does not have a solvency problem. Walmart does not have a solvency problem.
The US Government collects over 10^9 dollars annually and has a solvency problem. Go figure!
Not just the US but the European Union governments are up to their necks in do do and break time is over.
Those empty cities in China does not speak well for their capital allocation and Hades awaits.

But we should not treat this like it is some calamity like Katrina or aberration of the economy.
That is all hand waving by the politicians to muddy the water and deflect blame.
The underlying issues of the economy from 2006 onward have not been addressed.

Canada is a modern vibrant country and seems to have weathered the last five years in good stead.
Could it be they practiced what used to be referred to as conservative lending practices??
Could it be they did not allow their banks to operate like casinos??
Does Canada have an unemployment and foreclosure problem near the size of ours? I think not.

India is another example. With more people in poverty than the US has people did you ever hear
their politicians rattle on about redlining and brag about how they forced lenders to approve sub-prime
applications. I don’t remember emergency meetings in New Deli concerning the viability of their banks
or financial institutions. They had to react to their neighbors house on fire not their own.

“Don’t expect the people who caused a problem to solve it.”
–Albert Einstein

In short we need a kind of denazification policy but we have not identified the National Socialists yet.
The Tea Party is a step in this direction but bigger brains than mine will need to sort it out.
If it happens it will be ugly. You do not destroy trillions of dollars in assets without retribution.
That is why the Democrats and old line Republicans do not want to go down this path.
Where are the congressional hearings on Canadian vs. US banking practices?

> this means that theoretically, US government could be collecting $2 (40% taxes i.s.o. 20%) and spend $1.17.

That makes even less sense than I thought.

The evidence shows that increasing revenues by $1 results in $1.17 in spending, regardless of how revenues increased.

If you want to claim that this time will be different, that increasing revenues by $2 will result in less than $2.34 in increased spending, you get to explain why.

“We’re increasing the fraction of GDP collected in taxes” doesn’t explain why spending won’t go up even more – it just explains how you think that you’re going to get more revenue.

One explanation of why increasing tax revenues leads to even more spending is that spenders are optimists. (Tax rate hikes rarely bring in the predicted revenue because people adjust their behavior. This shouldn’t be a surprise to anyone who believes in using tax policy to influence behavior.)

> Could it be they practiced what used to be referred to as conservative lending practices??
Could it be they did not allow their banks to operate like casinos??

Could it be that the Canadian govt didn’t push its banks to make stupid loans? Could it be that Canada didn’t have Fannie and Freddie lying about fraction of subprime mortgages in the market? (That threw off everyone’s risk assessment.) Could it be that the Canadian govt didn’t give Fannie and Freddie stock special treatment on bank books, treatment that resulted in all banks overweighting on it, creating systemic risk?

“These two entities –Fannie Mae and Freddie Mac — are not facing any kind of financial crisis.
The more people exaggerate these problems, the more pressure there is on these companies,
the less we will see in terms of affordable housing.”
–Barney Frank of Massachusetts September 11, 2003

“We have, I think, an excessive degree of concern right now about home ownership and its role in the economy…
those who argue that housing prices are now at the point of a bubble seem to me to be missing a very important point…
This is not the dot-com situation… you’re not going to see the collapse that you see when people talk about a bubble.”
–Rep. Barney Frank (D-MA), June 2005.

“I think the responsibility that the Democrats have may rest more in resisting any efforts by Republicans in the
Congress or by me when I was president to put some standards and tighten up on Fannie Mae and Freddie Mac.”
— Bill Clinton on ABC’s Good Morning America September 25, 2008

“At this juncture . . . the impact on the broader economy and financial markets
of the problems in the sub-prime markets seems likely to be contained,”
–Federal Reserve Chairman Ben Bernank March 28, 2007

“We are on a path back to growth.”
— Timothy Geithner Treasury Secretary Aug. 2 2010

And what lessons have we learned. Barney still in office. Freddy and Fanny still playing with other peoples money.
Helicopter Ben still showering money and undermining the dollar with the usual knock on effects. We are so f*****.

Meanwhile to steal from H.G. Wells:
Yet across the gulf of space, intellects vast and cool and unsympathetic regarded our planet with envious eyes
and slowly, and surely, drew their plans against us.

“The US is insolvent and faces bankruptcy as a pure debtor nation but the rating agencies still give it high rankings ,”
–Guan Jianzhong July 21 2010 chairman Dagong Global Credit Rating, China’s largest credit rating agency

“In the places I like in the US the bureaucracy is not looked upon with any kindness or respect. This is not true in most of Europe (at least in my experience). ”

It is very variable. In Germany there is a serious insult “you are working like a public employee”. In France the best universities generally train public employees (in civil engineering etc.), and they are much respected.

I have found an interesting correlation: grid-like countries, where there are lots of cities which are important centers of commerce and culture that are not the capitol (US, Germany, Italy) the government is less respected than in star-structured countries where pretty much everything important happens only in the capitol (France, Denmark etc.).

If government has a budget (projected outlays) in 2010 of 10 dollars, and revenues of 9 dollars, and they decide to “close the gap” by raising taxes, what has *historically* happened is that would levy 1 dollars worth of taxes and in 2011 they would pass a 11.17 dollar budget against revenues of 10 dollars. If they passed tax levies of 2 dollars the budget would go to 12.34 etc.

Raising taxes can work to a point (let’s ignore the very real behavior modification that taxes create), but you HAVE TO RESTRAIN YOURSELF.

No, I do understand that that is the point you guys are trying to make : that no matter how much budget a government has, they will, always and everywhere, spend 117% of what they have.

I don’t agree with that assumption, and I haven’t seen anybody posting proof.
You are, of course, right that “you have to restrain yourselve”. I said as much by saying “US government could be collecting $2 and spend $1.17. ” – ie you need both : raise the income, and freeze/limit/… expenses.

People have posted evidence that historically, this overspending tends to happen, in the US. I offered some speculation as to why _US_ politicians might be inclined to behave that way.
An other point I’m trying to make is that (looking at eg differences in tax rates, or at the tax revenue/GDP ratios Winter mentions), it is incorrect to simply extrapolate the US situation to Europe and the rest of the world, as esr seems to be doing in this blog post. The evidence presented here so far also doesn’t, imo, support the claim the a libertarian style minimal state is the One True Way out of this mess.

> Raising taxes can work to a point (let’s ignore the very real behavior modification that taxes create), but you HAVE TO RESTRAIN YOURSELF.

But politicians do not raise taxes. At least not during the last 30 years.

Look at this list from the OECD. Tax revenues (% GDP) are almost flat between 1980 and 2009. For many countries, they are flat since 1965. All those “horribly irresponsible tax increases” were limited to the 1970s.

As far as salvaging the American economy is concerned, the one solution that you will never, ever see mentioned, is also the most obvious. Bring the troops home, and put the military/industrial complex back in its’ box. ;)

> I’m curious to hear from everyone in this thread how they believe this will play out both in Europe and in the U.S.

I think it might play out a bit like this.

1. Bitcoin will follow an exponential growth pattern
2. By March 2012 it have reached viable economy size with the market cap of a small economy and all useful type of trading instrument
3. This will be part of a self reinforcing trend of economic activity moving to Bitcoin where it is cheaper (because of trivial tax evasion and zero transaction costs)
4. Governments will be forced to default or inflate their currencies to the point of irrelevance. They will continue to exist for some time as powerless agencies telling people what to do and being completely ignored (a fact they will be seemingly oblivious to).
5. Any successor to government will not be able to tax people because widespread use of Bitcoin will make this infeasible to achieve. This will probably force society to be structured as an anarchy.

> I’m curious to hear from everyone in this thread how they believe this will play out both in Europe and in the U.S.

People switching to Chinese Yuan?

In the end, printed money is backed by production capacity, that is, backed by people willing to work for the bits of paper. And if there is one thing you must give the Chinese, it is that they are willing to work hard for paper money.

>As far as salvaging the American economy is concerned, the one solution that you will never, ever see mentioned, is also the most obvious. Bring the troops home, and put the military/industrial complex back in its’ box. ;)

Zeroing out the entire military budget would only address about 18% of the current deficit, and none of the part that is politically on track to get much worse due to demographic shifts.

There are many good reasons to cut defense spending. Deficit reduction is not a major one, and selling military cuts as a supposed solution is pure demagoguery — boob bait for idiots.

Zeroing out the entire military budget would only address about 18% of the current deficit…

18% is a nice start, but no military capacity at all is not a nice outcome.

I would think reducing our capability to fight so many wars at once, would also reduce our vulnerability to unexpected expenditures from fighting foreign wars.

5. Any successor to government will not be able to tax people because widespread use of Bitcoin will make this infeasible to achieve. This will probably force society to be structured as an anarchy.

Er, what? Why in the world would you come to that assumption? Bitcoin makes certain kind of taxing schemes impossible, but not ALL of them.

Raising taxes can work to a point (let’s ignore the very real behavior modification that taxes create), but you HAVE TO RESTRAIN YOURSELF. This is what politicians can’t do.

Sure they can. And have. Our politicians REFUSE to do this however. They would rather let the whole system crash and burn while they all struggle to be on top when it happens.

It’s like being a manager, and you know a 50% headcount reduction is going to happen in 2 years. You spend the next two years hiring as many people as possible so when it happens, you’re effected the least.

# kn Says:
> There is still the demographic problem as the baby boom
> generation approaches retirement age while the active
> population slinks, however.

This is the great social security lie. The problem with the solvency of social security is not demographics. No the problem is that the money those baby boomers deposited into the “social security trust fund” was stolen by governments past and present.

There have been a number of times when commercial companies “raided the pension fund” to pay for operating expenses. Usually the CEO goes to jail. I suggest a similar solution in the case of social security.

It is one of the fundamental problems of political systems: one group can make generous promises and reap the benefits, but not have to actually pay for these promises. This is exactly what is happening in, for example, Greece and Wisconsin. One group of politicians has bought their re-election with generous gifts, made with legal commitments. Then when someone comes along and says the well is dry, the true culprit — the one making an unsustainable promise — is off making a fortune on their autobiography book tour.

Perhaps a good sign for your next Tea Party rally would be “Not Demographics — Theft.”

What is the solution? Handcuffs. We used to have them. It was called the constitution. We could fix this forever with a simple constitutional amendment demanding a balanced budget, and fixing the only allowable form of federal tax to be a national retail sales tax of 10%. Then we sell off the family silver to pay for as many of the debts we can and default on the rest. If you have a balanced budget, your credit rating doesn’t matter.

>18% is a nice start, but no military capacity at all is not a nice outcome.

You may have missed my point. One of the stock demogogic tactics for distracting attention from the fact that entitlement programs have become an unsustainable monstrosity is to pretend that military spending is the problem. I agree zeroing out the military budget is not an option short of the entire abolition of the nation-state; I’m observing that even a cut that drastic would barely touch the problem, so no practical cut in military spending will matter.

One thing to remember about Greece, by the way, is that the country hasn’t had democracy for all that long. It was only in 1974 that their military dictatorship ended. And the same is true of Spain and Portugal too, actually. 35 years is not very long for people to adapt to actually knowing how to run a democracy, instead of just voting themselves piles of entitlements that the next generation won’t be able to pay for.

Winter Says:
> And if the money wasn’t stolen, who would there be to work for it?

Your question is extremely confusing. However, let me attempt to answer it. Saved money is used to form the capital necessary to form new businesses and expand existing businesses. These businesses create the value that society as a whole wants by the selection mechanism of the free market and customer choice.

Which is to say we have the choice of investing money in private business that use it, along with labor and entrepreneurial skill to create new value. Or we can waste it in ways that contribute low value to society but high value to re-election prospects.

I just think it would be nice if the people who run the government had to play by the same rules as the rest of us.

At T 1, you have 4 workers on 1 pensioner
at T 4 you have 1 worker on 1 pensioner

To be able to buy the same amount of working hours at T 4 as in T 1, you need 4 times as much money at T 4 as in T 1. That is the demographic time bomb.

As retirees need a lot of personal services, it really is working hours they need to buy, not stuff. You need production in the same currency to back the value of the currency.

If the money has been wasted before you reach retirement, things are even worse. In my country we have an obligatory pension scheme that stores an incredible amount of pension capital (a few times GDP). They do not waste it, although quite some was burned by USA bank fraud. Still, we are left with the problem that there will be too few people left to work for the money in a few decades.

Winter Says:
> To be able to buy the same amount of working hours at T 4 as in T 1, you need 4 times as much money at T 4 as in T 1. That is the demographic time bomb.

You said my investments paid out handsomely, so it sounds like I should have enough money to pay for all that stuff and those people I need.

If you point is that as the population ages needs move from manufacturing to services, and there are less people to provide those services, you are right. I am sure you recognize that capital is very good at replacing people with machines. So all those factory workers can train as nurses, cooks, and cruise ship dance instructors.

Which country are you from? You comment on their public investments piques my interest.

kn: What would constitute “proof” of government overspending? Everybody agrees that it isn’t anything like a mathematical necessity. Nevertheless, something that persistently happens can’t be ignored sanely. Past performance is all the proof you can and will get, but whether or not the proposition is “proved” I’d say the balance of evidence right now is on the side of those who say government overspending in many countries including the US is endemic, and if anyone’s got a burden of “proof” to the contrary it would be those claiming that gee golly if we just give them one more chance and another metric crapload of money that this time, honest, they won’t overspend, it’s not just another hit for the junky, we’re reformed now!

@Winter: “And if the money wasn’t stolen, who would there be to work for it?”

@Jessica: “Your question is extremely confusing.”

Jessica, I believe Winter’s point was that with a shrinking population of working age due to the demographic transition, we can expect labors costs to rise relative to the cost of capital. Therefore, retirees whose income is generated by investments in capital will be less able to avoid labor-driven services that they need in their old age.

Jessica, I believe Winter’s point was that with a shrinking population of working age due to the demographic transition, we can expect labor costs to rise relative to the cost of capital. Therefore, retirees whose income is generated by investments in capital will be less able to afford labor-driven services that they need in their old age.”

> it is incorrect to simply extrapolate the US situation to Europe and the rest of the world, as esr seems to be doing in this blog post.

ESR is not extrapolating the 19% to europe. Europe’s number may well be different, but there is one.

That said, any “solution” to US problems that assumes higher than 19% is probably doomed.

Also, maximizing “taxes collected as a fraction of GDP” is not the same as maximizing tax revenues. It’s interesting that the govt advocates in this discussion have argued for the former and not the latter. Is that because of ignorance or is it because they think that govt should be a larger part of the economy even if that results in a smaller economy and govt?

Note that the US is already collecting much the same amount of taxes as European countries on a per-capita basis. Therefore, it’s absurd to argue that the US would have Europe’s services with Europe’s taxes because we have the latter and not the former.

While I’m not a social security fan, I’d like to know how its detractors thought that it should have handled the “excess” receipts if loaning them to the federal govt was wrong. Or, is it that they think that SS should not have been collecting any more in a given year than it paid out.

Surely they can’t be arguing that the folks who ran Fannie Mae should have been investing SS proceeds in private companies.

It’s like being a manager, and you know a 50% headcount reduction is going to happen in 2 years. You spend the next two years hiring as many people as possible so when it happens, you’re effected the least.

If I were an executive? I would outright fire any manager that tried to pull crap like that on the spot. Then again, I wouldn’t be in that situation because as soon as I announced upcoming headcount cuts, I would also institute a hiring freeze effective immediately. The stuff they pull in large fat corporations boggles my mind.

You may have missed my point. One of the stock demogogic tactics for distracting attention from the fact that entitlement programs have become an unsustainable monstrosity is to pretend that military spending is the problem.

That and inventing terms like “corporate welfare.” Is it really so difficult for people to grasp the fact that corporations are not taxpayers, but rather tax collectors?

> 1. Bitcoin will follow an exponential growth pattern
> 2. By March 2012 it have reached viable economy size with the market cap of a small economy and all useful type of trading instrument

How many meals have been purchased with bitcoin? How many months of shelter? How much transportation?

Until Bitcoin is usable to purchase such things, its primary utility is as a clueless indicator.

My prediction – bitcoin will be in exactly the same state in March 2012 as it is today, less popular and less useful than esparanto. (That’s actually an exaggeration. Bitcoin is likely to be as useful as Klingon.)

From WSJ: “The price of one year’s worth of insurance against the default of U.S. government bonds has risen from 7 basis points on April 6 to 37 basis points on Tuesday, according to Markit, which tracks prices in fixed-income markets.”

Maybe I am just too much of a skeptic. But as of now.
Fanny and Freddy. Still funded.
PBS, NPR, etc. Still funded.
Amtrack, Planned Parenthood. Still funded.
Dept. of Education. Still funded.
EPA & Weather Service. Still funded.

Just a sample. All of these “services” at one time had or currently have market replacements.

Except for a lack of street theater how are we different from Greece.
We talk of re-plowing the field but will not even reach for the low hanging fruit.
How can we address Medicare if politicians can be scared into spotting their pants over NPR.

Jessica – But that will be after the revolution, I suspect. Way to true.
Problem is 40% of the population looks to the government for solutions.
The solutions are know and practiced. What is missing is the will.

Blaming the prince of the fools should not blind anyone to the vast confederacy of fools that made him their prince.
–anonymous

@ Andy Freeman
Since you wrote such long comments in reply to things I posted, I’ll do you the courtesy of reading them, but that’s as far as I’ll go.

When I write, paragraphs are more than a random collection of phrases, and a post is more than a random collection of paragraphs. Also, when I include a quote from an other commenter, that’s an indication of the context in which those paragraphs should be read.
By singling out sentences or even parts of sentences, you seem to miss all that context, and your effectively arguing aginst things I didn’t say, didn’t mean to say, and even implied. So I won’t waste my time on them.

# Cathy Says:
> we can expect labor costs to rise relative to the cost of capital. Therefore, retirees whose income is generated by investments in capital will be less able to afford labor-driven services that they need in their old age.”

But that is exactly backward. As labor costs rise the value of capital rises too, because one of the functions of capital is to replace labor.

For example, if a person can bolt wheels on a car for $8 per hour, and a machine’s cost to do the same is the equivalent of $9 per hour, I’ll use the person. If the person demands $10, I’ll use the machine. If the person demands $12 per hour, then the bank can increase my finance charge, so that the machine now costs be $11, and I will still use the machine.

To put it another way, on the bottom margin, increasing labor costs makes it more attractive to use capital instead of labor, and that makes capital more valuable.

I has a great equilibrium effect too. Because this drives workers out of capital intensive industries and into more service oriented jobs, which is exactly what is needed.

> To put it another way, on the bottom margin, increasing labor costs makes it more attractive to use capital instead of labor, and that makes capital more valuable.

No, it makes capital cheaper. If labor is scarce, an hour of labor can replace more dollars of capital. As we all know from Adam Smith, labor is the ultimate currency.

The real price of every thing, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. What every thing is really worth to the man who has acquired it, and who wants to dispose of it or exchange it for something else, is the toil and trouble which it can save to himself, and which it can impose upon other people. (Wealth of Nations Book 1, chapter V)

In short, if the Labor force : Dependants contracts from 4:1 to 1:1, then the proceeds of 4 hours of work then would only buy 1 hour of work now. Your investments must make up for that above other inflationary forces.

And not everything can be substituted by capital. Nurses, cleaning, hairdressers, doctors etc. have all proven very resistant to automation. There are experiments under way in Japan to test how far you can go with robots. But I, for one, would not trust we will be able to solve that problem. So, the demographic shift is a real problem. At least, we all will have to keep working for much longer and retire much later.

kn: What would constitute “proof” of government overspending? Everybody agrees that it isn’t anything like a mathematical necessity. Nevertheless, something that persistently happens can’t be ignored sanely. Past performance is all the proof you can and will get,

If by “overspending” you mean the governement spending $1.17 for every $1 it collects, I’m not arguang with that. Somebody posted a link, and besides that, the 1980s financial crisis I meantioned before was largely caused by government overspending in the 60s and 70s, and cumulation of interest on loans they took.
And I agree that trends tend to continu, and that, usually, next year will be like this year, or last year, and so on.

What I was asking “proof” for was the claim that “the entitlement-spending commitments of the U.S. Federal government, most U.S. state governments, most European governments, and indeed most national governments everywhere exceed the capacity of their economies to generate wealth. […] The amount of private wealth available to be taxed is insufficient, even if taxation could be raised to
100%”

Proof, imo, would be something along the lines of :
given current commitments, the projected expenses (for the next n years) for the US government are X.
The US GDP (over the same n years) is Y .
Y the economy can not generate the wealth requiered, even if taxed at 100%

To be fair, since 100% taxation is not realistic, I’d even accept a similar reasoning for a lower (average) tax rate.

Which brings me to my another point :
People here have mentioned that 20% tax is the maximum realistic rate for the US. Hence my point that one can’t just claim that “the spending of that’s allmost European governments, and indeed most national governments everywhere exceed the capacity of their economies to …” without a building a similar proof (or a founded extrapolation) based on the tax/GDP ratio that people in those countries would put up with, expense commitments and GPD of those countries, etc.

Winter Says:
> If labor is scarce, an hour of labor can replace more dollars of capital.

That is a really odd way of saying it, but I think the point you are making is that if you denominate value in terms of hours of labor, then that measure of capital decreases. But that is a terrible way to denominate value. The purpose of economic activity is to produce goods and services. Your example seems to connote that the purpose of economic activity is to consume labor and consume capital. This is just plain wrong, though certainly very Keynesian.

If a good or service can be produced two ways, manual labor or automation, increasing labor costs makes it more attractive to use capital, and consequently, capital becomes more valuable relative to labor, and consequently the return on capital investment increases.

You are correct that some jobs can’t easily be replaced by capital, however, some can and labor movements fills in the gaps. But you overestimate this somewhat. For example, the use of electric hair clippers and blow dryers replaces some of the labor associated with hairdressers. Keyhole surgery reduces the medical effort required for many procedures, vacuum cleaners reduces the labor for cleaning and so forth. (Imagine the amount of extra cleaning staff a large hotel would have if they did not have vacuum cleaners.)

“The United States in now required to borrow approximately 40 cents for every dollar of expenditures. Your proposal would require cutting roughly 40 percent of all government payments.”

If that isn’t unsustainable spending, I don’t know what is.

Consider that to cover this with more taxation, you would have to increase taxes by 40% overnight. And that’s to pay today’s costs, but given growth of entitlements and unfavorable demographic shifts, that will become worse tomorrow.

“The United States in now required to borrow approximately 40 cents for every dollar of expenditures. Your proposal would require cutting roughly 40 percent of all government payments.”
Consider that to cover this with more taxation, you would have to increase taxes by 40% overnight

I dont think so.

If I read that correctly, US gvt finances every dollar it spends with $ 0.4 from loans, and 0.6 from revenue, presumably taxes.
or, you finance your expenses with 60% out of revenue, 40% from loans.

That 60% is generated by taxing at ~24%
To finance your expenses a 100% from tax, you would thus need (24 / 60)*100 = 40% tax rate

you can spin that a couple of ways, eg “increase taxes with 20%”, or “raise the the tax rate to 40%”, or “double the tax rate”, but I don’t quite see the “ncrease taxes by 40% ” there. Correct me If I’m wrong,

as it happens, a ~40% tax to GPD ratio is not that extraordinary, outside the US.

Cathy: “’The United States in now required to borrow approximately 40 cents for every dollar of expenditures. Your proposal would require cutting roughly 40 percent of all government payments.’ Consider that to cover this with more taxation, you would have to increase taxes by 40% overnight.

kn: “I dont think so.”

You’re right, I miscomputed. It’s actually much worse than I thought. If we are currently paying for 60% of current expenditures with taxes and 40% with borrowing, then eliminating borrowing would mean we need to raise taxes by 0.4/0.6 = 67%. That is, we are taxing $0.60 today and tomorrow we need to tax $1.00, so we need additional taxes of (1.00 – 0.60) = $0.40, and our current taxes raise $0.60, so taxes would be (0.60 + 0.40) / 0.60 = 1.67 times what they are today.

Anyone here think Americans are prepared to pay an additional 67% in taxes over and above what they pay today? Again, this is without taking into account further growth in future entitlements.

Anyone here think Americans are prepared to pay an additional 67% in taxes over and above what they pay today? Again, this is without taking into account further growth in future entitlements.

Like I said, you can spin it a number of ways, depending on the message you want to get across. And “double of current taxes” or “an additional 67% in taxes over and above what we pay today” sounds like a lot.

otoh, European governments can get away with tax ratio’s of 30-45%, and that’s apparently all the US needs.

People are getting themselves quite lost between the issue of tax rates, and percentage of GDP as tax revenue. They are different numbers, measuring different things, and most of the math above ignores that.

> otoh, European governments can get away with tax ratio’s of 30-45%, and that’s apparently all the US needs.

That “apparently” ignores relevant facts.

(1) The US govt doesn’t seem to be able to collect above 20%, no matter what it “needs”. Any plan that assumes otherwise will fail.

(2) Even if the US govt could collect 40%, the available evidence strongly suggests that spending would go up even more. Any plan that assumes no increase in spending ….

(3) The 40% of GDP plan assumes no effect on GDP – that’s unlikely. Even if we could collect 40%, the resulting decrease in GDP would mean that 40% wouldn’t cover current spending.

We still haven’t established that the US govt “needs” to spend 40% of GDP. Current US tax receipts, per capita, are about the same as western european countries (plus Canada). Surely that amount of govt spending is “enough”.

People are getting themselves quite lost between the issue of tax rates, and percentage of GDP as tax revenue.
They are different numbers, measuring different things, and most of the math above ignores that.

you’re right, and I ‘m guilty.
The problem is, I don’t quite see in how far they are different numbers, measuring different things – I’m assuming the difference would be negligible for the sort of ball park math I was doing.

Feel free to redo the math taking into account the differences between tax rates and percentage of GDP as tax revenue – I’d be interested to see how works out.

[kn]> otoh, European governments can get away with tax ratio’s of 30-45%, and that’s apparently all the US needs.

That “apparently” ignores relevant facts.

(1) The US govt doesn’t seem to be able to collect above 20%, no matter what it “needs”. Any plan that assumes otherwise will fail.

(2) Even if the US govt could collect 40%, the available evidence strongly suggests that spending would go up even more. Any plan that assumes no increase in spending ….

(3) The 40% of GDP plan assumes no effect on GDP – that’s unlikely. Even if we could collect 40%, the resulting decrease in GDP would mean that 40% wouldn’t cover current spending.

I put that “apparently” there precisely because I see there are other factors, beyound a simple calculation, that play a role here.
I do wonder why European governements can get away with such “high” rates, or why Americans are so much more reluctant to trust their governement with their tax money. (I raised that question also in an earlier post)

(3) The 40% of GDP plan assumes no effect on GDP – that’s unlikely. Even if we could collect 40%, the resulting decrease in GDP would mean that 40% wouldn’t cover current spending.

True, but we’re just doing ballpark figures. Also, remember we started from “even at 100% taxation, no economy can support that sort of spending”. We’re down to ~40% now, with evidence that ithat is not an unreasable number (except in the US, but esr’s post never limited the discussion to US only)

Anyway, I’m repeating myself, and it’s getting near bed time on this side of the globe ….

We still haven’t established that the US govt “needs” to spend 40% of GDP. Current US tax receipts, per capita, are about the same as western european countries (plus Canada). Surely that amount of govt spending is “enough”.

Here’s a perfect example of why it is extremely difficult to raise tax revenue as a % of GDP beyond a narrow range. Consumers and businesses will take extraordinary steps to route around the “damage”.

“California’s state legislature on Tuesday passed a budget package that included a bill that would require online retailers such as Amazon to collect sales taxes if they have affiliates in the state. Gov. Jerry Brown has endorsed the budget package and is expected to sign it this week.

“Amazon.com Inc. told its California online affiliates Wednesday that it will cut its relationships with them if an online-tax collection law is enacted in the nation’s most populous state.”

>“Amazon.com Inc. told its California online affiliates Wednesday that it will cut its relationships with them if an online-tax collection law is enacted in the nation’s most populous state.”

There’s a more general point here than Cathy is explicitly making. Even leaving aside conscious moves to reduce tax exposure (like Amazon’s), the effect of raising taxes is to suppress business activity that would otherwise take place, because it raises the overhead of transactions without increasing their value to the parties. The second-order effect of reducing business activity is to reduce tax collections.

Economists call this effect “deadweight loss”, and it operates even when nobody is consciously trying to avoid paying taxes. So, the theory that raising rates would solve the deficit problem if corporations like Amazon were paying their “fair share” doesn’t work either. Not that it would anyway; they just pass the tax bite along in higher prices.

Do not overlook the elephant, hippo, rhinocerous, sperm whale and blue whale in the room! :)

> True, but we’re just doing ballpark figures. Also, remember we started from “even at 100% taxation, no economy can support that sort of spending”. We’re down to ~40% now, with evidence that ithat is not an unreasable number (except in the US, but esr’s post never limited the discussion to US only)

The U.S cannot support our spending at 100% taxation if you count what we need to finance our entitlements. Our entitlements are unfunded. If they were funded, they would require $70 trillion to fund. The U.S. has about $14 to $20 trillion in debt. Our states and local governments have funded pensions, but they are underfunded by some trillions of total dollars. I’m doing this from memory, and I’m pretty sure I’ve left out about another $17 trillion we collectively owe but don’t have. Private wealth in this country was $47 trillion recently. 2009, maybe. It may be less now. This is why I maintain that we cannot support our spending at 100% taxation.

That 40% only covers our current rate of expenditure. That rate will climb as more Americans retire and start collecting Medicare, Social Security and state and local pensions. It will also climb due to ObamaCare.

What esr actually said was this:

> As I have documented many times on this blog, the entitlement-spending commitments of the U.S. Federal government, most U.S. state governments, most European governments, and indeed most national governments everywhere exceed the capacity of their economies to generate wealth. And demographic trends are making the imbalance worse over time, not better.

> This is why raising taxes won’t help. The amount of private wealth available to be taxed is insufficient, even if taxation could be raised to 100% without suppressing all economic activity.

What esr said was true, because he is considering “entitlement-spending commitments” and “demographic trends”. You are ignoring these.

Tom DeGisi Says:
> Private wealth in this country was $47 trillion recently.

you know the government ran up these debts, why does it always fall to the private citizen to pay them off? Perhaps it is necessary, but surely before we dig them out of the hole they have made for themselves, we should reasonably demand two things from them:

1. They stop their profligate ways.
2. They sell off the assets they have acquired with proceeds of their stupidity to reduce the debt as much as possible.

We have only talked here about the first. What about the second? The US Government, and all State Governments have huge amounts of assets mostly unused, and certainly underutilized. We should demand they sell all that stuff off first before we give them another dime.

However, it seems almost unthinkable. The Governator in California suggested selling off San Quentin, a prime piece of real estate if ever there was one. There was an outcry. A housing development or business center built on that beautiful piece of land would be worth a fortune. Yet, instead it is occupied by an ugly building full of thugs and murderers.

Who’d buy all that stuff? Well the people who currently hold the debt of course, including all those retirees who have been screwed over by the social security debacle. One wonders what burst of creative energy would follow the release of these stale, suppressed resources if they were opened to the energies of the free market.

> The US Government, and all State Governments have huge amounts of assets mostly unused, and certainly underutilized. We should demand they sell all that stuff off first before we give them another dime.

1. Who will buy them? If we only have $47 trillion in private wealth it won’t be us. And we are the wealthiest country in the world.
2. What are they really worth? Our political system is pretty good at making sure that any real wealth tied up in government assets is already being used to make somebody rich. You talk about San Quentin. We do have to build prisons somewhere. Maybe California could build a new prison somewhere else cheaper. It will take fifteen years to finish the envionmental impact statements and resolve the NIMBY lawsuits. I’m not sure California, given it’s dysfunctional government, actually could build something cheaper, even on the cheapest land in California. I know our political system is inefficient, but I really don’t think we can come up with ~ $100 trillion of waste, fraud and things to sell. Sorry. Doesn’t pass the smell test. At all.

> Who’d buy all that stuff? Well the people who currently hold the debt of course, including all those retirees who have been screwed over by the social security debacle. One wonders what burst of creative energy would follow the release of these stale, suppressed resources if they were opened to the energies of the free market.

Say what? Social security checks are fungible and useful. You can buy groceries with them. Shares in San Quentin? Not so much. I’m not seeing it.

Tom DiGisi, the government is sitting on an immense number of acres of land that could be profitably sold. Some of it in urban areas and some of it rural. Nearly one-third of the state in which I reside is Federally owned land. Start selling it.

Tom DeGisi Says:
> 1. Who will buy them? If we only have $47 trillion in private wealth it won’t be us. And we are the wealthiest country in the world.

Asked and answered.

> 2. What are they really worth? Our political system is pretty good at making sure that any real wealth tied up in government assets is already being used to make somebody rich.

I don’t know if it would pay off all the debt, but it would pay off some of the debt. If you are a bankrupt, you have to sell your Porsche before you can settle 10cents on the dollar.

> Say what? Social security checks are fungible and useful. You can buy groceries with them.

Set up 100 large companies. Randomly divide the assets up amongst these companies. Give shares in these companies in some appropriate fashion to the debtors in exchange for extinguishing all or part of their debts. Float the companies on the stock market. TD Ameritrade converts the shares into grocery money.

It is really pretty straightforward, though I will grant you politically impossible.

> It is really pretty straightforward, though I will grant you politically impossible.

OK, well then I expect we’ll do something else. Al Gore is also good at politically impossible solutions. So am I. I think the Palestinians should have a real right of return – to all the countries that kicked out the Jews in 1948. This is way more politically possible than Gore’s favorite stuff.

> Tom DiGisi, the government is sitting on an immense number of acres of land that could be profitably sold. Some of it in urban areas and some of it rural. Nearly one-third of the state in which I reside is Federally owned land. Start selling it.

OK. I’m in favor of it. I’m also in favor of cutting waste, fraud and abuse. My point is not that these are bad ideas. They are good ideas. They just aren’t ideas which address this problem in a significant fashion. I’m guessing that this unsold land is not worth more than $2 trillion. That’s 2% of the problem. I would be very, very, very happy to be proved wrong. So happy I might even Google for it.

Jessica Boxer – you know the government ran up these debts, why does it always fall to the private citizen to pay them off?

My point exactly. Fanny and Freddy did not originate at a meeting of the Elks lodge.
Why is it elks, masons, Knights of Columbus and boy scouts paying for the clean up??
esr wonders about the continued employment of Steve Ballmer.
Is there any organization with a bottom line that would still pay helicopter Ben Bernanke??
Would any CEO green light a project that had the track record of the Dept. of Education??

The Tea Party and their embrace of the original founding principles is a start.
The entrenched leadership in both parties is beyond redemption.

How is it going to end is already described:

“Highly indebted governments, banks, or corporations can seem to be merrily rolling along for an extended period,
when bang! – confidence collapses, lenders disappear, and a crisis hits.”
–Carmen M. Reinhart and Kenneth Rogoff in This Time is Different

What and when this particular black swan is going to bite our ass is anyone’s guess.

Because things are the way they are, things will not stay the way they are.
–Bertolt Brecht

But they’re not getting away with it. Hence the problems in Greece, the PIGS, and other European nations in general. That’s why Greece is hat in hand asking for bailouts. (Who’s going to bail the US out?)

The USA has developed the most powerful economy and military force in the history of the planet (by far). As a result, some believe that we will muddle through this financial crisis simply because of our inertia and big stick. Others believe that cultural chaos in a complex and highly interconnected world may introduce unpredictable consequences that cannot be mitigated by size and power alone. Game theory modeling has demonstrated that, indeed, events can deteriorate very quickly into a self-reinforcing downward spiral and the end result is a drastic reduction in all constituent populations. Wanna guess the mechanism of reduction?

Tom DeGisi Says:
> These guys put it at $175 billion, plus $800 million in oil and gas rights in 1981.

Sounds very dubious to me, admittedly, they are numbers for 1981, but here is one plain data point. ANWR has 10-20 billion barrels of oil recoverable, or so it is said. Most likely, due to the political climate that is a low ball. That is worth $2 trillion wholesale today. Now I’m not saying it is worth $2 trillion in the ground, but it is certainly worth a lot more than $800 million. And that is only ANWR. There are massive amounts of unconventional oil reserves throughout the continental US, and Alberta is doing pretty good off that stuff. Most of it is under Federal land.

Oh and don’t forget the RF spectrum, the USPS, all those military bases, NASA, masses of buildings, the list goes on and on. (And don’t they own a few car companies? I don’t remember how that all worked out.)

And there is something else really important here. Take an organization like the USPS. If that organization was reorganized and run without all the quasi government crap (like the universal service obligation), all those resources were use efficiently, there would be a massive stimulating effect on the economy. It is bad enough that they own all that stuff, they don’t even run it right.

“toh, tax rates in, say, Belgium, are way higher, and most people end up effectively paying ~40%. In other European countries, this may even be higher. So that 20% is a US-specific limit, not a hard, universal limit.”

The difference is that in Europe, you tax the poor. The US could raise a lot more money if it had a twenty or thirty percent value added tax, and an income tax and social security tax that took a hefty chunk out of people on the basic wage.

However, for taxes that are more politically popular, (“soak the rich”) 20% is about the limit. You run out of “rich” people mighty fast.

The US corporate profits tax is well past the laffer maximum (being double taxation. If it was halved, the US would get more revenue. But if the US taxed poor people at the same rate as it now taxes corporations, it would also get more revenue. Poor people cannot rearrange their affairs so that their income appears in Burmuda as easily as rich people can, so if you want to maximize tax collected, you need to tax poor people more, and rich people less. You also need to tax essentials more, and luxuries less.

@Shenpen>I have found an interesting correlation: grid-like countries, where there are lots of cities which are important centers of commerce and culture that are not the capitol (US, Germany, Italy) the government is less respected than in star-structured countries where pretty much everything important happens only in the capitol (France, Denmark etc.).

Interestingly the same here. The states that have a dominant urban area are in bad shape. States that are more middle/lower class and do not have a dominant urban area are in relatively good shape. Texas is unique, it has competing large urban areas and vast rural areas. California…is California. A wealthy state for sure….but messed up politically and divided North/South.

At a trillion dollars we are two orders of magnitude away from solving the problem. That is a lot of ground to make up. You are making a very convincing argument that we should do it for other reasons, but not at all convincing that it will work for this problem. It’s like wind power. Sure we should be investigating wind power. Sure we should build wind mills where it makes sense. But will it make a significant difference in actual energy policy? No.

Sorry. Not a solution. Not close. Every little bit does help, but it’s only a little bit.

Jessica Boxer – you know the government ran up these debts, why does it always fall to the private citizen to pay them off?

IMO there is two answers to this question.

The tongue in cheek/flippant answer is “The people who voted for the government in question get to pay it off”. And before someone trots out democrat vs republican arguments i’d suggest they work on evidence that shows that their particular side hasn’t run up any debts (which, to my limited knowledge, is impossible without trying to argue “my side never got a chance” but i’m willing to be proven wrong).

The hard-nosed realist answer is “It doesn’t really matter why, there’s no plausible future where the private citizen doesn’t pay for it somehow”. The buck is guaranteed to get passed until it can be passed no more.

>( 3) The 40% of GDP plan assumes no effect on GDP – that’s unlikely. Even if we could collect 40%, the resulting decrease in GDP would mean that 40% wouldn’t cover current spending.

> True, but we’re just doing ballpark figures.

What makes you so sure that the effect is ignorable in “ballpark figures”?

As has been pointed out, the US per-capita GDP is significantly higher than Europe’s.

That shouldn’t be. The US spends a lot more on defense. Its size makes transportation more expensive. It still has a lot of pre-WWII industrial plants. And so on. Europe should be ahead, or at least even.

It’s not.

Could it be that Europe’s 40% tax burden has a GDP effect?

There’s a related question. Maximizing “taxes collected as a fraction of GDP” is not the same as maximizing tax revenues. It’s interesting that the govt advocates in this discussion have argued for the former and not the latter. Is that because of ignorance or is it because they think that govt should be a larger part of the economy even if the result is a smaller economy and govt?

> I do wonder why European governements can get away with such “high” rates, or why Americans are so much more reluctant to trust their governement with their tax money. (I raised that question also in an earlier post)

Here’s an idea. I’ve met very few Americans who think that the US govt can run his/her life better than he/she can. (Yes, I ask.) Almost all insist that govt doesn’t make the correct decisions for him/her.

> Labor and capital are both complements and substitutes in production.

But it is labor that pays your food and rent. There are only two ways to make a living, either you work, or you let others work for you. Your time is irreplaceable. That insight goes back all the way to Adam Smith.

> The difference is that in Europe, you tax the poor.

What piece of misinformation gave you that idea. Tax rates in continental Europe are extremely progressive. Effectively, they are almost flat.

> you know the government ran up these debts, why does it always fall to the private citizen to pay them off?

Because the government, that is us, not them. There is no other people that are government. You know, government of the people, by the people, for the people. These are all Americans.

> Could it be that Europe’s 40% tax burden has a GDP effect?

But China has lower tax rates (17%) and even less GDP. So the correlation between taxes and GDP is less than straightforward. Maybe an influx of low wage workers and a Keynesian overspending policy explains the high GDP of the USA better? All that dept does increase economic growth, you know.

And here is a little riddle about USA government dept. Who buys the bonds, and why?

In the 1970s, the USA had the brilliant insight that if everybody pays for oil in US dollars, then the USA could print extra dollars without fear for currency devaluation. Effectively, the USA could print money against the production of other countries who needed the dollars to buy oil.

The next brainwave was that if you could get the receivers of all these dollars (the oil sellers) to spend them in the USA, you could keep printing extra dollars without a devaluation. That came out to about a 7% GDP that could be spend in addition to what the USA produces itself (the infamous trade deficit). But the US population did not want to sell anything for those dollars coming home. That would defeat the concept. So they sold these countries US treasury bonds and powerless “shares” (all these bubbles). That is, people accepted US$ and them lend them back to the US. So the rest of the world is paid in dollars the US first borrowed from them.

That worked so well, that it was also used for other imports. So currently, the US pays the Chinese for imports, and the Chinese use the money to buy USA bonds. Effectively, the Chinese work for the USA being paid with their own money.

If this cycle of accepting US$ for oil and other products and then lending it back to the US stops, the US$ will fall deep, very deep. And then it will become very difficult to buy oil and other stuff.

Since around 1990, the USA has found it more and more difficult to entice all these dollars back. Hence all the bubbles, Internet, housing, derivatives etc., that were actively pumped up to get foreigners to invest their dollars in the USA.

If the US ever stops borrowing foreign money, they will have to do more than just cut back on entitlements. Then the dollar will fall to less than half of it’s current value (again).

It is about risks. There are quite a number of Americans that want to live in a gated community where they lose most of their freedom. They do it because they feel more safe.

Europeans also want to be insured against the risks of life. As the US shows, it is difficult to organize a comprehensive health-care, pension, and social security system based on private initiative. So Europeans chose to organize these insurances nation wide.

Many of our taxes are entitlement specific. I pay earmarked taxes for health-care, pension, disability, and social security (the dole). These are separate from my income tax and are not mixed in the budget. The government budget can allocate additional “tax money” to these entitlements, but cannot transfer entitlement money to the normal budget.

Depends per country. De Tocqueville wrote about 150 years ago, that if people want a public library, then in America they found an association and gather donations, in England they ask a charitable lord, and in France they go to the government. I think the Swiss would do the same as Americans, Italians would do nothing just complain, the Germans or Austrians would go to the local government and not the federal one, the Belgians would end up with two public libraries, one in French and one in Flemish, the Hungarians would split into factions spending ages about debating where and how big it should be, and the Polish would end up building another bar.

> How many meals have been purchased with bitcoin? How many months of shelter? How much transportation?

Actually I don’t think I’ve ever purchased anything with Bitcoin.

>Until Bitcoin is usable to purchase such things, its primary utility is as a clueless indicator.

Indeed. This is probably the most commonly concern voiced about Bitcoin. You could make equivalent arguments about Linux in 1991. Everything starts small and grows, the amount of stuff you can buy with bitcoins is constantly increasing.

>My prediction – bitcoin will be in exactly the same state in March 2012 as it is today, less popular and less useful than esparanto. (That’s actually an exaggeration. Bitcoin is likely to be as useful as Klingon.)

That would involve a significant reversal in the long term trend-line. You can see a long-term straight trend-line on thislogarithmic chart, which suggests exponential growth. I don’t see any reason for this state of affairs to continue. Especially since bitcoins have held their value despite two (1, 2) major setbacks in a row.

> Bitcoin makes certain kind of taxing schemes impossible, but not ALL of them.

To tax people you need three things:
1. A well defined unit of value to tax (a currency)
2. The ability to monitor transactions
3. The ability to take the relevant tax revenue off people

Under the current system the unit of value is whatever the relevant national currency is. Banks (which everyone is effectively required to use) are required by law to provide 2 and police forces will take the tax revenue by force if you don’t give it up voluntarily.

With bitcoin as the unit of value it becomes more difficult. Bitcoin’s highly anonymous nature makes 2 infeasible (it can be traced, but only by time-consuming forensic techniques). Even if you could work out how much you were supposed to take, 3 would be hard to achieve. To confiscate bitcoins you need to have either the cryptographic keys or the cooperation of their wallet service (who has no need to be anywhere near your jurisdiction). It’s not very feasible to tax bitcoins.

Suppose I use bitcoins to buy a new laptop. The government may not know anything about the bitcoins, but they can damn sure make UPS/FedEx/etc. report what they delivered to my house. The government will then simply assign a ridiculous value to the transaction, and leave me with no alternative but to supply the documentation proving the actual, lower value, so that I may be taxed on it instead. Now that I have an incentive to report the transaction, the seller will have to report as well, or risk having to pay a penalty for failing to report it. And that means that I have to report transactions that I fear might be reported by the other party….

Another reason for self-reportage: if an unreported asset is stolen or destroyed, I can’t file a police report on it without incriminating myself. I can’t recover anything from an insurance policy without reporting that I had the asset, and governments will require insurers to upload this information to them.

I paid my writers in bitcoin since I run a magazine about bitcoin. I paid for my hosting in bitcoin. I paid for my domain in bitcoin. Soon, I will have a domain name using the distributed Namecoin DNS system, in which I converted my bitcoin into namecoin. Donation and advertising revenues are all bitcoin.

I written code for bitcoin, and so on.

Your perception of the bitcoin economy can be misleading as it is much easier to see the exchanges rather than the individual relationships and the invisible economic relationships that connects throughout the bitcoin economy.

Also, do not be taken into by media’s often inaccurate reports bitcoin as many did not do their research.(The Economist is an exception though) A few media outlet thought the MtGox crash spelled the end of Bitcoin, but they were completely wrong.

>> Suppose I use bitcoins to buy a new laptop. The government may not know anything about the bitcoins, but they can damn sure make UPS/FedEx/etc. report what they delivered to my house.

The operator of a bitcoin stock exchange is working on a way to decentralize logistics. I don’t know if it will succeed, and it may not, but people in the bitcoin community thought of everything that could poses a risks and some are already working on solutions.

Let also not forget that much of the economic activities in the bitcoin world is going to be digital. Unless they take draconian measure to censor the internet, it’s going to be hard to stop.

In any case, I would still bet a few dollars for some bitcoin in the case that it does take off, because you will be fricking rich. If not, you just lost a few dollars.

@TomC
> which was on the above mini-debate about how a change in labor supply conditions could be expected to affect the return to capital. Maybe I was too subtle.

Probably too subtle for me. But actually, I was not so much reacting to your comment (too rash writing) as to this remark by Jessica Boxer:

> Your example seems to connote that the purpose of economic activity is to consume labor and consume capital. This is just plain wrong, though certainly very Keynesian.

My point was that if labor gets scarce, productivity enhancing measures get more valuable. That is first, not Keynesian. Second, it means labor gets expensive, and that is a problem in every pension scheme.

Just hoping that the labor shortage can be offset by increases in productivity, ie, capital, is rather naive. In general, a reduction in the work force induces a shrinking economy. For every hour of work I save now, I can buy much less hours of work later. The combined growth due the interest on my savings and the increase in productivity must be large enough to offset the reduction in the work force. And for many countries the projected reductions are substantial.

I do not share all this optimism about productivity increases being enough to negate the effects of the shrinking labor force.

But you are not digital. Historically, states solved this problem by sending someone to your house and taxing you on your estimated worth.

To continue with Winter’s point, historically, people who are able to obtain taxable goods/services in excess of their taxable income are considered criminals – the state would simply assume that you are involved in money laundering or racketeering, as those are the primary reasons why an individual would have far more taxable goods/services than their taxable income level suggests.

The operator of a bitcoin stock exchange is working on a way to decentralize logistics.

At some point, the laptop will be in a large building with a bunch of other laptops. Large numbers of Men With Badges And Guns will show up to audit the operations. There will have to be records of where those goods are going, so that the recipients can be taxed, or the operator of that large building will be handed the tax bill himself. He’ll then add that to the amount of Bitcoin he charges for the laptop, and only if I’m galactically stupid will I think I’ve avoided taxation.

> It is about risks. There are quite a number of Americans that want to live in a gated community where they lose most of their freedom. They do it because they feel more safe.

Umm, you don’t understand gated communities.

Gated communities exist because Americans don’t trust govt to provide security, so they band together to provide security. Some small communities do trust govt, but in those cases, the police force works much like security in a gated community. In both cases, the security is to protect insiders.

I don’t understand the “lose most of their freedom” comment. The people who choose to live there don’t think that they’ve lost any freedom. They’re able to do the things that they want to do.

Yes, their children may feel constrained, but that’s how spoiled children feel, regardless of where they live.

Are you sure that you’re not confusing gated communities with planned communities? They’re not the same. (Most planned communities are not gated and there are gated communities that are not planned.)

A private system that tries that will lose his money to one that won’t.

The facts are that literally every single developed nation except the United States has comprehensive government universal government health care systems in place — and Americans are among the least healthy people in the developed world, despite paying more per capita for health care than anyone else in the world. In part this is because Kaiser Permanente engineered the U.S. health care system to charge more while providing less.

Things like this tend to do up libertarians in knots. Another example is that extensive government regulation can actually foster that oft-touted virtue of capitalism, competition. Which is why in Europe, for 40 euro a month you can get phone, TV, and broadband internet at speeds that are unavailable in the U.S. to anything smaller than a medium-sized business.

>and Americans are among the least healthy people in the developed world

Nope.

If you dig into the facts behind this claim, you’ll discover awkward things. Like the fact that American infant mortality rates look high relative to Europe’s only because of a difference in what’s counted as “infants”. And that the most recent major international study of “health outcomes” actually used the extent to which health care is paid for by other peoples’ money as an input to the quality measure, thus guaranteeing that some socialized-medicine systems would be rated better even if they killed more patients.

Americans pay more for medicine mainly because we have the capability to keep very old, very ill people alive with heroic measures and have made a cultural decision to use that capability to the fullest. Those costs would be unbearable if they fell on the oldsters and their families, so hospitals and drug companies and other providers find ways to shift them into infrastructure paid for by the younger and healthier.

This is the grain of truth behind “death panels” – the left is correct when it whispers that rationing is the only route to cost containment within the assumptions of the present system, and populist right-wingers who seize on that whisper have failed to call for the only actual remedy. The entire structure of government subsidies for healthcare needs to be scrapped – not tinkered with but scrapped – so the medical supply chain will actually get some market discipline.

Those pushing government intervention as the answer to health issues should also be keeping an eye on the increasingly hot story around the question of diet, and whether one should consume more carbs or more fat (and associated complicated questions, I’m just invoking the debate here, not laying it out). If it does turn out the “more carbs” line was false, then the government itself created the obesity epidemic and all the associated metabolic syndrome problems, not only here but abroad, and has killed and maimed by the tens of millions in the process. Against a debit like that, government health care isn’t all that great of a credit; mitigating (not even curing!) the diabetes it created “for free” with my tax dollars looks less like altruism and more like a solid entry for Top Five Most Evil Acts in the 20th Century.

This is the grain of truth behind “death panels” – the left is correct when it whispers that rationing is the only route to cost containment within the assumptions of the present system, and populist right-wingers who seize on that whisper have failed to call for the only actual remedy.

To be more precise, any scarce good must be rationed—the only question is by what means. An anarchic market economy rations goods and services by diverting resources to those uses which people value most highly, which they indicate by being willing to pay higher prices for them. A command economy does so much more explicitly.

Thomas Sowell points out that, interestingly enough, in the political debates leading to the institution of Medica*, proponents didn’t claim that basic medical care wasn’t available to the poor, because charitable organizations (especially religious and other not-for-profit hospitals) provided it to what once was called the deserving poor. The claim instead was that it was demeaning to accept charity and somehow more noble to take others’ contributions by force.

If it does turn out the “more carbs” line was false, then the government itself created the obesity epidemic and all the associated metabolic syndrome problems, not only here but abroad, and has killed and maimed by the tens of millions in the process.

I wasn’t going to bring this up, but since it’s here, “this!” Laws and sausage met in sweet, fatty irony when the initial “eat less fat” USDA recommendations were made: The proposed recommendations (while still flawed) got munged so badly by various food-industry lobbyists that the final output was not only wrong but (conveniently?) not even amenable to particularly accurate scientific inquiry with the current technology.

I place the USDA’s dietary recommendations in the same moral, ethical, and scientific bin as Mao’s agricultural ones.

> You know what that means, folks. If this is successful, drugs and kiddie porn will dwarf all other uses of this network.

A couple of US senators are attacking us from this angle (I expect the DEA will get back to us in a few years ;). I don’t care. You could have shut down the internet in its infancy for exactly the same reasons.

Interestingly the parallels between the Internet in the early 1970s and Bitcoin today are very strong. Both are vulnerable to shutdown by a sufficiently determined and competent higher authority, both have the potential to have civilization scale disruptive effects and both are run by the same playful, inventive and anti-authoritarian geek archetype.

Winter, I thought you lived in the Netherlands? We’ve seen the controversies about euthanasia in the Netherlands in recent years.
And those of us interested in the topic follow the issue of rationing and waiting times in Britain as well.

> In my country, no one is denied necessary care, ever.
> And we most definitely have no death panels.

Define necessary. By doing so you will either have required your country to exceed its GDP in heath spending (you can always spend more money to make people live longer) or you will have created a criteria for “death panels” to use in the allocation of heath care. Only one of those claims can be true.

The point deserves to be extended so we can disprove the claim “You can’t put a value on life”. Suppose some person X is going to die unless £Y is spent on their healthcare, will that £5 be spent? For a low enough Y the answer is yes, for a high enough Y the answer is no. The crossover point is the objective economic valuation of their life.

As for earlier claims, often you see single-payer advocates use infant mortality and life expectancy statistics to make claims about the inferiority of US health care. However, infant mortality statistics are not comparable from country to country due to definitional differences ( and some outright fabrication in statistics reported to WHO – as WHO admits). Further, there is no evidence that access to health care is the predominant factor in infant mortality as comparisons made by the CDC show that there is wide variation in infant mortality, even after correction for economic status, among different ethnicities.

As for life expectancy, that is dominated by lifestyle choices having nothing to do with access to health care at all. And as we recently saw in Japan, more fabricated statistics and it turned out that immense numbers of people in their ’80’s, 90’s and even 100’s were long dead but left on the roles by families fraudulently accepting their benefits.

I am rather surprised about the willingness of Americans to expose their complete ignorance about European health care and public health.
In my country, no one is denied necessary care, ever

I second that.

@Peter Davies

Define necessary.

I can’t speak for the Netherlands, but in Belgium, that’s decided on a case by case basis between the doctor and the patient.
The doctor, in case you’re wondering, is not a public servant. The patient simply gets a refund.

> I can’t speak for the Netherlands, but in Belgium, that’s decided on a case by case basis between the doctor and the patient.

Google “heart transplant belgium” find some interesting results.

However, they weren’t the ones that I was looking for. I was looking for the per-capita rates for various countries because if the claims are true, both Belgium and the Netherlands should be off the chart relative to the US. I also wanted the comparable numbers for other organs, knees, and hips.

Meanwhile, we have the NHS denying care to “fatties”, smokers, and old people.

Oh I get it – care isn’t “necessary” for such folk and it isn’t “care” to do procedures on them or given them drugs.

Waiting times: I’ve heard people say wait times are much longer under government-run systems and I’ve heard people say the opposite. Intuition about the basic nature of incentives tells me the former is true, but I’ve had at least two people claim their experience was one of never having to wait for any substantial time, in a manner which made it difficult for me to catch them in an outright lie, or say definitively that their experience was rare.

Thomas Sowell: “In Canada, 27 percent of the people who have surgery wait four months or more. In Britain, 38 percent wait that long. But only 5 percent of Americans wait that long for surgery.”

That’s not sourced any further than that article. I might be able to source it in one of his books I have. Meanwhile, Sowell has a reputation for being dismissed out of hand by govt health care proponents, so I won’t get very far there at any rate. He DOES grind a very anti-regulatory axe. I doubt he’s lying, but is he telling all of the relevant truth?

Well, let’s read carefully. The above was published in 2009. It probably hasn’t changed significantly since. It probably isn’t due to deregulation creeping into a pristine govt-run system; I probably would have heard about it otherwise. It does say four months. Could this be hiding something? If so, we’d expect, say, the remaining 73% of Canadians and 62% of Brits getting surgery right away, while most of the 95% of Americans are still waiting 3-4 months. Given no further information, I suppose that’s possible.

There’s also a distinction to consider between health care and medical care. Medical care has to do with patching you up if you’re broken; health care has more to do with making sure you don’t break in the first place. To put it more cleanly: a nation’s mortality rate is not a direct indicator of the quality of its health care system. People die or incur care for different things. Many of those things aren’t addressable by better health care. Regular checkups aren’t going to make you immune to homicide.

Proponents of government-run health care cite the American life expectancy vs. that of other countries. According to the Jan 1 2008 Annals of Internal Medicine, the American College of Physicians calculated the rate of “mortality amenable to health care” – the U.S. came out in the top three.

Could be. It’s even possible it might be my code. I wrote the very first C implementation of a Bayesian spam filter back in….2002, I think, after Paul Graham invented the technique in Lisp. Might have been 2001. I knew the technique would sink into obscurity unless somebody ginned up a version in a “real” language (sigh…) and I like Paul, so I wanted to help him out. It’s still out there: bogofilter.

In the US, zero value added tax. In Europe, fifteen to thirty percent value added tax. Similarly, most Americans pay no income tax. Most Europeans, including most working poor Europeans pay substantial income tax.

Taxing the poor, and taxing essentials, is the only way to extract large amounts of money for the state to waste. It is hard to tax the rich, they slip from your grasp. Thus statist societies always go after the poor.

“Waiting times: I’ve heard people say wait times are much longer under government-run systems and I’ve heard people say the opposite. Intuition about the basic nature of incentives tells me the former is true, but I’ve had at least two people claim their experience was one of never having to wait for any substantial time, in a manner which made it difficult for me to catch them in an outright lie, or say definitively that their experience was rare.”

You can get really quick treatment under socialist health care in the sense that they bandage you and give you an aspirin pretty quickly, indeed the wait time for minor treatment is often lower than for more market oriented health care.

The relevant measure is wait time for treatment that is an absolute emergency, for treatment that absolutely positively has to be done right away, but which is expensive and complex.

One such condition is retinal detachment. Under socialist health care, pretty much everywhere, this is typically done around in fourteen days or so, which delay usually results in blindness.

What tends to happen under socialist health care is that if you go to emergency with a bad cut on your knee, you will get a bandage and aspirin pretty quickly, and if you go to emergency with retinal detachment, you will also get a bandage and and an aspirin pretty quickly.

Winter Says:
“Look at this list from the OECD. Tax revenues (% GDP) are almost flat between 1980 and 2009. For many countries, they are flat since 1965. All those “horribly irresponsible tax increases” were limited to the 1970s.”

Yet Greece has been raising tax rates regularly, while tax revenues as a proportion of GDP fell.

What we see is that large changes in tax rates are accompanied by small changes in tax revenues as a proportion of GDP, consistent with the conjecture that taxes are generally well past the Laffer limit.

Suppose you tax certain parts of your economy, the politically incorrect parts such as wealth obtained from factories, at about the laffer limit, while subsidizing or lightly taxing other parts,

Obviously the politically incorrect parts will shrink, and the politically correct parts will grow, resulting in falling tax revenues as a proportion of GDP at the same tax rates. So you raise tax rates, and lo and behold, revenues fall even further.

@James A Donald
“Yet Greece has been raising tax rates regularly, while tax revenues as a proportion of GDP fell.”

And then follows a theoretical analysis that could not be more distant from what is happening in Greece.

The problem in Greece is that only blue/white collar factory workers and civil servants paid income taxes. Anyone not on a salary/wages would not pay income or capital taxes. Most notably, companies, the self employed, and wealthy individuals would not pay taxes. What was left was VAT and the other taxes on product sales (trafficking cars and cigarets used to be more profitable than coke).

Official tax rates are completely meaningless and irrelevant to who pays what.

BTW I have a testable theory why some countries have more Libertarian cultures than others – and even how to increase it.

Basically, on the whole, if you spend your whole life living in a rented apartment and working as an employee for someone else, esp. in a large firm, the general insecurity and dependence makes you want the government to counterbalance the power your employer and landlord has over you. While if you own a small business or are self-employed, and own a house, you feel more empower to have a DIY attitude to your life, you need little public assistance, regulation will feel to be at least as much an annoyance as a protection, and generally don’t feel weaker and inferior and oppressed and exploited by people richer than you because you spend most of your life in your own microkingdom where nobody but you calls the shots.

One of the interesting and relevant technical terms European historians of agriculture use is “American-style agriculture” vs. “Prussian-style agriculture”. The first is the model where farmer families own their lands. The second is where people work as employees for large landowners. Eh, I don’t remember the exact details, I’ve learned about it at school 15 years ago, but anyway. This terminology I think really sheds some lights on the causes of the difference. Insofar as living as self-employed homeowner is or historically was a typical and widespread way of living (and people tend to have houses instead of apartments – more independence, important!), the population tends to lean Libertarian, insofar as working for somewhere else and renting an apartment from a landlord, they tend to be statist. This theory predicts very well why city-dwellers are more statist everywhere than rural people: because they are less likely to own houses, land or be self-employed.

The method for changing the culture of any country to be more Libertarian is then fairly clear: change policies so that many people turn into property-owners and thus can actually begin to learn to respect property, feel more empowered, more independent and more DIY. For example, houses or apartments in government-owned housing projects should be given to their tenants as property. Radical tax cuts for small business employing less than 10 people. Get rid of zoning so that people don’t need to commute into the city center, which means they can buy houses where it is cheap, in the countryside. Etc. They are fairly uncontroversial (i.e. the left finds it hard to argue against them) and I think would work.

Andy Freemen:
> Meanwhile, we have the NHS denying care to “fatties”, smokers, and old people.

What you, and many Americans, don’t seem to grasp is that there is more than one way to implement a public health care system. In stead, when you hear the words public health care system, you (plural !) seem to dream op this image of a statist | evil communist| facist police state | lazy incompetent bureaucrat run system, and then go look for anything that can be tweaked and twisted to fit that image, or present opinions and innuendo as facts

This discussion is beginning to show severe signs of zealotry and holy wars.

similar example:
# Peter Davies Says:
>So in this case the doctor and the patient make up the aforementioned “death panels” (presumably with some nudging from the doctor in the direction of sane cost management).

I said It before, but I’ll spell it out this time : The Belgian Health Care system works pretty much like a private insurance – except that it’s funded by tax. You pick the MD / hospital / whatever of your chosing, you pay him, and you claim a reimbursement.
What incentive does the doctor have to “nudge in the direction of sane cost management” ? If anything, it’s in his benefit to keep the patient alive as long as possible, for return business.

> Tax rates in continental Europe are extremely progressive. Effectively, they are almost flat.

Tax rates that are”extremely progressive” are not “almost flat” by definition. So, which is it? (We’ll see below that Europe’s tax systems are much less progressive than the US.)

>> The difference is that in Europe, you tax the poor.

> What piece of misinformation gave you that idea.

VAT has been mentioned. Europe also taxes the middle class far more – its tax systems tend to be much less progressive than the US. That’s basically how Europe manages to have less after-tax/benefits income inequality than the US.

> > Meanwhile, we have the NHS denying care to “fatties”, smokers, and old people.

> What you, and many Americans, don’t seem to grasp is that there is more than one way to implement a public health care system.

While that is true, we also have a lot of experience with public health systems in the US. If this comes as a surprise, you don’t know enough about the US to comment intelligently on US health care.

Yes, I’m saying that the US has public health systems. We have Medicaid, Medicare and their state analogs, SCHIP, the Indian Health System, the VA, various systems for public employes, as well as state programs that don’t fall into those categories.

Are you seriously claiming that we should think that how the Belgian system works is more relevant to public health in the US than our own systems?

> In stead, when you hear the words public health care system, you (plural !) seem to dream op this image of a statist | evil communist| facist police state | lazy incompetent bureaucrat run system, and then go look for anything that can be tweaked and twisted to fit that image, or present opinions and innuendo as facts

Are you seriously claiming that NHS doesn’t do what I said that it does? If so, what’s the basis for that claim? I’m basing my statements on NHS officials quoted in various UK newspapers.

I picked the NHS because US politicians and the relevant federal officials cite it as an example to emulate.

> I said It before, but I’ll spell it out this time : The Belgian Health Care system works pretty much like a private insurance – except that it’s funded by tax.

Private insurance doesn’t have unlimited funds, so it doesn’t pay for everything.

Does the Belgian Health Care system have unlimited funds? If it doesn’t, it can’t pay for everything.

Where can I find information on how many organ transpants it does? How about joint replacements?

> In stead, when you hear the words public health care system, you (plural !) seem to dream op this image of a statist | evil communist| facist police state | lazy incompetent bureaucrat run system, and then go look for anything that can be tweaked and twisted to fit that image, or present opinions and innuendo as facts

Given my life long experience with American run government bureaucracies, the word incompetent comes forcefully to mind. This is particularly true with respect to Federal (nation-wide) bureaucracies. The reason is pretty simple: It’s hard for a bureaucracy governing 300 million people spread over this large of an area to avoid the information problem. I would expect a Belgian bureaucracy to do significantly better, simply because it governs many fewer people in a much more manageable geographic area. In addition, the American system of government is designed so that the three branches are in constant, jealous conflict. That has some excellent side effects, but I suspect if degrades bureaucratic effectiveness.

> Yes, I’m saying that the US has public health systems. We have Medicaid, Medicare and their state analogs, SCHIP, the Indian Health System, the VA, various systems for public employes, as well as state programs that don’t fall into those categories.

I forgot to mention that if we take the total amount of money spent on these systems and divide it by the total population, we get an amount that is significantly larger than the per-capita spending by other country’s “universal” systems.

So, when someone says that a universal system in the US will be cheaper, provide better care, etc. I ask why the US govt run health systems have not yet done those things. They have the money, etc.

I’ve no doubt that some countries can run efficient and effective health systems. That doesn’t imply that the US can.

When US govt health systems are better than US private systems, then we’ll talk.

Sweden and Japan have the highest life expectancies in the world. Both have public healthcare systems. In both cases the total cost of health care per capita is significantly below the cost in the US (30-50% cheaper).

While some difference can be attributed to a more unhealthy lifestyle in the US, this is a strong indicator that the US system is very inefficient. I have personal experience with emergency healthcare in Sweden, Japan, Germany, France and the US. While all systems gave me adequate help, the US system was way more focused on documenting my treatment than actually treating my ailments.

While I think a reform of the way healthcare is organized would improve the situation, a much bigger problem is the risk of lawsuits for malpractice. The US needs a legal reform, where the patient takes on more of the risk involved in personal healthcare. Unfortunately this requires a better social security network for those who are unfortunate and can’t support themselves after accidents, sickness or mistakes in medical treatment.

The entitlement state, as esr puts it, actually keeps a huge number of people from dying. Some because their continued medical treatment is paid for by their peers through taxes, some because they will not starve to death. I have known people in the US who have died because they could no longer afford their medical treatment. I have known people in the US who were unable to change jobs, because doing so would mean no more medical insurance and no continued treatment for life-long ailments. I know people in the US who have been unable to get jobs that they were the best person for, because of health insurance problems.

This should be of great concern for the libertarians who write here. These problems make the job market inefficient, and it is one of the few fields where experience from other countries show that there is something to gain from government administration.

A health care system is probably most efficient if most of its components are run by private enterprise, but government control is needed to ensure that all citizens are treated equally.

>I have known people in the US who have died because they could no longer afford their medical treatment.

You credit the entitlement state with alleviating a problem it created and sustains. U.S. medical costs are high enough to lock people into their jobs precisely because medical price signals have been largely swamped by the amount of tax subsidy flowing into the system – the incentive on the providers is to gold-plate everything. there’s no market discopline.

@Jacob Hallen, first of all life expectancies are utterly meaningless with respect to the success of a healthcare system. Very little of what differs among various nations life expectancies has anything to do with healthcare delivery. E.g., homicide rates, suicide rates, lifestyle choices, etc. Its a completely fraudulent statistic used often in very dishonest ways by “single payer” advocates. Secondly, Japan’s life expectancy statistics are very suspect as its come to light that there are large numbers of “elderly” on the roles collecting pension benefits fraudulently as their families do not report their deaths.

I have very serious doubts about anyone in your personal knowledge dying due to not being able to afford medical care. There are indigent medical care programs in the US.

@esr
“U.S. medical costs are high enough to lock people into their jobs precisely because medical price signals have been largely swamped by the amount of tax subsidy flowing into the system – the incentive on the providers is to gold-plate everything. there’s no market discopline.”

As opposed to the UK or French system which have much lower costs and still keep people like Stephen Hawking alive?

@SPQR
“I have very serious doubts about anyone in your personal knowledge dying due to not being able to afford medical care.”

That might be dependent on what circles you attend. Also, it is the chronic conditions that will kill you in the end (see the example below).
Treatment for chronic conditions is less visible than that for emergency care, but much more expensive.

If the US part of Sicko is as accurate as the UK and French parts (the European part is accurate), Michael Moore had some graphic examples of people being denied life saving care.

Although the patient is still alive, it is worrisome. Because she is depending on donations from strangers. Poor people might get the treatment they need on a philanthropic basis, but they also might not. “I know of no cases” seems to me not a solid foundation for policy decisions.

>If the US part of Sicko is as accurate as the UK and French parts (the European part is accurate),

Given the man’s MO, I’m sure the European part of Sicko describes what Michael Moore wants others to believe about European health care, which closely corresponds with what Europeans want to believe. On the other hand, Michael Moore is a political hack, a hypocrite, and an apparently shameless liar. I wouldn’t take his films as good evidence of anything, and I recommend not taking them as good evidence about American conditions even if their description of European ones happens to be accurate.

Greece is not where it is because it overspent. It is where it is because it joined the euro before it was ready, and used accounting fraud to do so.

Everyone knows what the solution is – let Greece default, and probably exit the euro – but is equally terrified by what that would entail. European banks, like their American counterparts in 2007, are undercapitalized and overexposed to high-risk debt (Greece) masquerading as low-risk debt. The euro itself is a strange mixture of politicians with the will to create a monetary union but without the mass support to create the fiscal union necessary for it to actually work.

The United States, by contrast, is already a monetary and fiscal union. That’s one reason California is nothing like Greece. The other is that California’s welfare state is, like all American states, relatively threadbare by European standards. The problem is simply that the state requires a two-thirds majority to tax but only a simple majority to spend. Change one or the other and the problem will go away.

@esr
“Sicko describes what Michael Moore wants others to believe about European health care, which closely corresponds with what Europeans want to believe.”

I know the situation in Europe enough to see that what MM showed was factually correct. I do not want to believe British doctors are not poor, and British patients are treated, long term, at no cost. I know this is true for a fact.

You response reminds me of that farce about Stephen Hawking not having survived the NHS. That farce showed one thing: Ignorance about health care systems is unfathomable in the USA

In an editorial on July 31, Investor’s Business Daily warned of end-of-life counseling in health care reform by saying people like Stephen Hawking “wouldn’t have a chance” in such a system.

“People such as scientist Stephen Hawking wouldn’t have a chance in the U.K., where the National Health Service would say the life of this brilliant man, because of his physical handicaps, is essentially worthless.”

In fact, Professor Hawking lives in England, where he has been treated by their National Health Service. And by his own account, it saved his life.

Btw. I would like to support KN.

I live in the Netherlands. Several of my relatives and personal acquaintances have undergone world-state-of-the-art treatment of cancer (I read the original scientific papers, I work with MDs who travel the world teaching cancer treatments). Old people have had hip replacements, eye surgery etc. All without them having to shell out any money. All under the same insurance rules. All freely choosing their doctors and hospitals.

I know our system has trade-offs, as have the Belgium, German, and French systems. The trade-offs are different in each system. But all are cheaper than the current USA system, and all supply state-of-the-art treatment for everyone, without patients becoming bankrupt from bills. None has a death-committee the USA is so fond off. If you claim they don’t supply good and universal care, prove it. We have ample evidence and experience they do supply this care.

If you do not like such systems, please, do not implement them. It is your country. But do not propagate lies about our doctors murdering patients to save costs to convince your compatriots to make your choice.

>If you do not like such systems, please, do not implement them. It is your country. But do not propagate lies about our doctors murdering patients to save costs to convince your compatriots to make your choice.

I haven’t made any such claims. But when others do so, I find them believable because that’s what the economics tell me is the likely outcome.

You are invited to explore this point by looking into the very public health policies in Europe. Our newspapers are also rated higher on the Free press scale than USA papers, so they will help you investigating these claims. You will find very little. Things go wrong occasionally, but shit happens everywhere. That is it. No scandals about large number of people getting killed to save money.

For instance, I know my country is often accused of using Euthanasia to cut cost. But all studies show that the biggest problem with Euthanasia is that those who want it cannot find a doctor who is willing to execute the will. Stories about delaying treatment to cut cost (e.g., delaying eye surgery, leading to blindness) are rather odd given the cost of our lifelong universal disability payments. And organ transplants are not limited by cash, but by lack of organs. Only the Belgians have a culture where healthy young adults get themselves killed in large numbers on the road. In other countries, people tend to die when their organs are not useable anymore.

Not sure what the situation is in your country, but any claim that the UK NHS will provide “universal care” – whatever a patient needs, regardless of cost – is untrue. Stephen Hawking may have been lucky, but there are plenty of examples of people being refused life prolonging treatment because it is “too expensive” or “not approved”. Hoping that these links don’t trigger a spam filter:

@James M
“Stephen Hawking may have been lucky, but there are plenty of examples of people being refused life prolonging treatment because it is “too expensive” or “not approved”. ”

I know these cases. The “not approved” is about “evidence based medicine”: There must be double-blind studies (or equivalent) that prove the drug is better than existing drugs for the specific condition. I also remember the herceptin case, where the committee tried to delay introduction of the drug. That was quickly overturned, sadly not quick enough for the patients. There are bastards everywhere.

We too had questions about the financing of extremely expensive drugs for relatively small patient groups. A large number of such drugs came available in a short time, messing up the budgets. In all cases I am aware of, the matters were settled fast without the patients denied the access. Where necessary, bureaucratic creativity was used to shift the costs to where it was best placed. And wherever there were fears of real shortages, the news media were on top, tipped off by the medical staff.

That is not really surprising. This type of “flashy” care is only a small part of the budget, easily solved. The bulk of the medical budget is spent on mental diseases and treatment. Psychosis, schizophrenia, other mood disorders, and dementia are prevalent and require a lot of specialized care. That is where the money goes, not cytostatica.

Only the Belgians have a culture where healthy young adults get themselves killed in large numbers on the road. In other countries,

No, no. We have that here, too. That’s why those between the ages of 16 and 25 pay higher auto insurance premiums than everyone else. I’ll bet this exists elsewhere in Western culture as well. Here in Florida, there are a number of young people who like to drive fast Japanese sporty motorcycles (aka “crotch rockets”), drive like maniacs and wear no helmets. We call them “organ donors,” and, sadly, many of them actually literally qualify for this distinction every year.

@SPQR
“I have very serious doubts about anyone in your personal knowledge dying due to not being able to afford medical care.”

That might be dependent on what circles you attend. Also, it is the chronic conditions that will kill you in the end (see the example below).
Treatment for chronic conditions is less visible than that for emergency care, but much more expensive.

Winter, my “circles” are that I practice law in the US in the area of consumer bankruptcy, estate planning and probate. I deal with the issue of medical bills and terminal care regularly.

As for the controversy about Dutch euthanasia policies and the issues with just how “voluntary” they are, I have no desire to make what you seem to feel are attacks on your country but the news reports I see come from your country and are not things I’ve fabricated on my own. That something else is viewed as a “bigger” problem hardly refutes the point.

@SPQR
“As for the controversy about Dutch euthanasia policies and the issues with just how “voluntary” they are, I have no desire to make what you seem to feel are attacks on your country but the news reports I see come from your country and are not things I’ve fabricated on my own. That something else is viewed as a “bigger” problem hardly refutes the point.”

The law and courts are pretty clear, involuntary deaths are murder. If you do not have an incurable disease, with unbearable suffering, and two MDs supporting your request, it is utterly illegal. And proceedings have to be open to be legal. There are boundary cases, and these are mostly assisted suicide. I vaguely remember a few (1?) murders that tried to hide between euthanasia, and these were treated as such.

Anyhow, the number of euthanasia cases are below 3000 a year. That would not be a cost saving in the grand matter of things.

The “reports” you heard about are probably from our own breed of religious fundamentalists who promote the suffering of others because “God wants it”. Euthanasia, abortion, and gay marriages have very broad popular support. Except with the religious fringe.

> I have known people in the US who have died because they could no longer afford their medical treatment.

There are a number of Americans on this list. Let’s find out how many of them know such people.

I’m an American and I don’t know anyone who fits that description.

> I have known people in the US who were unable to change jobs, because doing so would mean no more medical insurance and no continued treatment for life-long ailments. I know people in the US who have been unable to get jobs that they were the best person for, because of health insurance problems.

And now we know that someone is making things up.

If you have health insurance in the US, there are no “pre-existing” condition restrictions, whether you’re transferring from one employer’s plan to another, from an employer plan to a privately purchased plan, or the reverse.

Andy, I’m on your side but I have to call bullshit on this one. Anecdotalism from you isn’t any better evidence than hearsay from the other guy. Besides, you and your peers are among the least vulnerable to the problems in the system, and I think you know that. Being in the right doesn’t excuse arguing dishonestly and disingenuously.

As for the controversy about Dutch euthanasia policies and the issues with just how “voluntary” they are, I have no desire to make what you seem to feel are attacks on your country but the news reports I see come from your country and are not things I’ve fabricated on my own.

just to clarify : in a nutshell, euthanasia in Belgium and the Netherlands is about the right of the patient to choose death. That right is limited, re. the incurable disease with unbearable suffering attested by MDs. It’s an extension of assisted suicide : the patient does not have to carry through the act of killing himself, he may request his doctor do it for him. The legislation was created to protect these doctors from being accused of murder if they fulfill such request.
There might be cases where the patient’s family can make the request on behalf of the patient – I’m not sure, but it’s never the doctor’s decision to kill a patient.

Somehow, I’d expect libertarians to be upset about this limitation of personal freedom rather than about the freedom itself.

In any case, sensationalist newspapers and other media usually try to put a spin on it that reminds people of nazi Germany and horror conspiracies etc. It makes for a better story, especially when there are no recent alien abductions to report on.

> Anecdotalism from you isn’t any better evidence than hearsay from the other guy.

He’s claiming personal knowledge, not hearsay.

> Besides, you and your peers are among the least vulnerable to the problems in the system, and I think you know that.

Not so fast. My father was literally born in a log cabin. At least a couple of my relatives didn’t get indoor plumbing until the late 60s. I suspect that several of the American readers belong to churches that have poor members or do local poverty outreach. Both of those things opportunity to see “died because couldn’t afford medical care” if it actually happens.

In other words, some of us do have significant contact with poor America. (We already know that one guy does legal services for folks with money troubles.)

I agree that we’re “well-off” Americans, but what are the odds that a European participant in this conversation has a contact with poverty in America that none of us has?

I think that he’s claiming a story that he heard/read as his own. How do you propose that we find out?

I thought I posted this comment already, but apparently not. According to this article the first of the PIGS, Portugal, has had its bonds downgraded to junk. However, the most important point I think in this article is this:

German Finance Minister Wolfgang Schaeuble called for limits to be placed on the rating agencies’ “oligopoly.”

So, you see, the problem is not that Portugal spent way more than they could possibly bring pay, or that they did not fulfill their obligations. No the problem is that it is a conspiracy of evil American corporations attacking sophisticated Europe. The phrase “shooting the messenger” comes to mind.

Which only goes to show that the political class will do absolutely anything to stretch out the eventual denouement of their unrealistic dreams.

I believe it was Diderot who said: “Men will never be free until the last king is strangled with the entrails of the last priest.”

Asset sales are dangerous, think Russia 20 years ago. Generally it results in the following:

1) Haste, desperation combined with corruption and political favoritism and special interest groups result in assets sold at really low prices. Goverments on the whole are not much better at selling assets than managing them – why would they be?

2) Remember, markets are efficient only because the price signal system. Sell things cheap and it is almost guaranteed that they will be used stupidly and inefficently. If smartphones would cost one cent I’d probably buy one from my dog just for the lulz –> grand-scale waste. (The (in)famous red sludge disaster in Hungary was based on some guy buying an aluminum factory for 1% of its estimated value, pledging that he will get rid of the accumulated red sludge, which he never did, and he was politically well-connected so nobody really enforced the contract.)

3) If the sales is corrupted enough, it makes a lot of people rich without deserving or earning it – buy it low, sell it on the market, pocket the difference. This generally increases anti-rich, and as a corollary, anti-capitalist sentiments because most people are not bright enough to separate the deserverd rich from the undeserved, or fortunes made on the market or by such corrupted political means. All they see it is wealth held privately.

4) Assets are lot more visible form of wealth than bank accounts. As it makes the wealth inequality more visible, it increases anti-rich sentiments, which increase anti-capitalistic sentiments.

5) Similarly, as assets are a lot more visible form of wealth than f.e. bonds, insofar as foreign debt-holders buy up lot of assets, nationalistic and xenophobic sentiments will rise. As in, another yellow scare.

6) Finally, as a lot of US debt is held directly or indirectly by the Chinese government, I think it would be dangerous for a tyrannical government to get influence in a democratic country by becoming a large-scale property-owner, directly or through proxies.

Personally I think if governments should not be allowed to hold much property they also should not be allowed to sell it, it is two sides of the same coin, and thus privatisation ought to be done by rehomesteading, project housing given to tenants, and suchlike. But that does not help with debt.

ESR says: These are all excellent points. Well analyzed and well expressed!

Shenpen, I agree with most of your points, and a have had many discussions with Russian ex-pats about the disastrous dismantling of the USSR.

That is why I proposed doing it a different way: the government doesn’t sell the assets at all, but allocates them to private corporations, and gives pro-rata shares to the debtors and other obligation holders. Private for profit corporations will do a massively better job reallocating the resources than the government themselves will, which is why the government should not be handling any of they money directly.

In regards to the Chinese government: I’d rather they owned a tract of land in Montana than what they currently own, namely Uncle Sam’s testicles.

However, let me say again, I don’t think it is politically realistic to believe that this will ever happen. We are not suffering anything like enough pain for the political sophisticates to give up their power yet.

“Robert Murphy has a fairly detailed discussion of assets that could be sold, concluding that the total of reasonably liquid ones is about $1.6 trillion. That doesn’t include buildings that are currently unused or underutilized, and other more difficult to estimate (and perhaps to sell) assets.”

That isn’t much money in this context. Yes, we should sell assets, and yes, I like your privatization plan but it does not solve our problems. It’s wind power. Both are single digit percentages of the solution. We need the equivalent of fossil fuels and nuclear power.

esr,

> Today it needs updating. Men will never be free until the last bureaucrat is strangled with the entrails of the last priest.

Then men will never be free, since we create both bureaucrats and priests like we breathe. The new anarcho-capitalist man is as much utopian monster as the new Soviet man. We aren’t ants (new Soviet man) and we aren’t bears either (new anarcho-capitalist man).

Tom not sure who “he” is, and not sure who “Robert Murphy” is, and I don’t have a link to the analysis. I grep-ed this page and couldn’t find the quote you gave. Consequently, I can’t comment on its accuracy except to say that if it concludes that the Federal government’s assets are less than $2 trillion, it is almost certainly wrong. It obviously depends on how you count. If you think of “oil and mineral rights” as the asset, it is worth a lot less than “unrestricted property rights to areas that contain vast mineral wealth.” If you think of “right to use this frequency range of the EM spectrum over this geographical area” as the asset, it is worth a lot less that “full and permanent ownership of that frequency band.”

But as I say, since I don’t have access to the analysis I can’t seriously critique it. And, for the record, I don’t think I have ever claimed that there are sufficient assets to liquidate all our debt. However, as I have said before, the bankruptcy court will insist you sell your Porsche and your Picasso before it lets your settle your debts at 10 cents on the dollar.

Tom, here’s a fe data points for you:This article lists nine assets that you probably wouldn’t even think of, valuing them at over half a trillion dollars. You know what they say Tom, half a trillion here, half a trillion there, soon your talking real money.

As mentioned before there is probably 20billion barrels of oil in ANWR, not to mention its other values. In the ground, at present prices, that is probably worth between 500billion and a trillion.

The Green River Formation is estimated to have 1-2 trillion barrels of recoverable shale oil. Even if they most you can make is $5 per barrel, after taking off recovery costs, and discounting for future value, that is $5-10 trillion worth worth right there.

A tiny sliver of the EM spectrum was just bought by Verizon for $5billion dollars. How much is the whole thing worth? Surely 100 times that at least.

I’m sure we could all dig up more. Of course these things aren’t worth that if they are dumped on the market in one blob, that is why you don’t sell the assets, you give them to companies and pay off debt with shares in these companies.

I don’t know what the whole number is, but it is way more than $1.5 trillion.

> And, for the record, I don’t think I have ever claimed that there are sufficient assets to liquidate all our debt. However, as I have said before, the bankruptcy court will insist you sell your Porsche and your Picasso before it lets your settle your debts at 10 cents on the dollar.

So are we in furious agreement? I like asset sales. I want to do asset sales. And I want to use a plan that maximizes the debt retired by those asset sales. Your plan, at least a first glance (because just as IANAL, IANA Economist) looks like a great way to maximize debt retired.

> I don’t know what the whole number is, but it is way more than $1.5 trillion.

Way? Four times gets us to $9 trillion. Still in single digits as a percentage. Still wind and solar. Eight times gets us to $18. Better than wind. Now it’s in U.S. nuclear range. That’s better. Still, I’d like something more solid than “way”. And something more in the French nuclear range.

Just a comment about some of the tax percentages thrown around. Especially now when politicians and pundits are deliberately confusing the discussion by incorrectly interchanging the terms “tax rates”, “tax expenditures”, and “tax revenue.”

When comparing tax revenue of as percentage of GDP, the 19% in USA versus the percentage in Europe (usually quoted ~ 40-50%), it’s important to realize that the 19% GDP is of total federal revenue. Most quotes I’ve seen of total federal, local, and state revenue is ~30-40% (which may not be a consistent percentage over time as has the federal revenue take has been). There are a lot of different European countries, so hopefully someone can clarify whether the Europeans have subpolitical unit taxes. I just remember the surprise of some foreign exchange students when they found out that we had additional local and state taxes, so I assume there are different tax collection and redistribution schemes than what happens in the USA.